Amendments to the Political Constitution of the United Mexican States (the Constitution) providing for reforms to the Mexican energy sector became constitutional on December 16 as the majority of the Mexican state legislatures have approved the decree, which was previously discussed and passed in both chambers of Congress.
The energy reforms decree specifically amends Articles 25, 27 and 28 of the Constitution and contains 21 transitory provisions that direct and further develop the reforms and contain other energy policy measures. This decree was approved by the Senate on December 11 and the House of Deputies on December 12, and may now be enacted by the signature of President Peña Nieto. It will enter into force the day after publication in the Official Federal Gazette.
Overview of reforms
The intent behind this decree is to reform the energy sector in the country, namely with regard to hydrocarbons and electric power. To that end, both Petróleos Mexicanos (PEMEX) and the Comisión Federal de Electricidad are mandated to become, in accordance with applicable Mexican laws, State Productive Companies (SPCs) within a period of two years.
Additionally, both the exploration and production of hydrocarbons and the transmission and distribution of electric power are declared of social interest and public order and will henceforth be prioritized for land use purposes.
Reforms specific to hydrocarbons
The amendments to the Constitution allow for investors – whether national or foreign – to participate in the exploration, production and refining of hydrocarbons, thus ending the monopoly that PEMEX has enjoyed in the sector for 75 years.
The property of the state over hydrocarbons found within the subsoil is again confirmed and hence not subject to adverse possession or any type of transfer (inalienable). However, the state will be permitted to pursue the exploration and production of hydrocarbons through contracts with SPCs (including PEMEX) and/or private investors. Such contracts will be granted by the Secretary of Energy (SENER) with the assistance of the National Hydrocarbons Commission (CNH) through four types of contract structures:
- service contracts,
- production-sharing contracts,
- profit-sharing contracts, and
- licensing agreements.
The state will determine which contract structure will maximize the nation’s revenue in each case. The legislature has 120 days to pass the required amendments to the legal framework in order to properly regulate these forms of contracts.
Existing allocations (asignaciones) to PEMEX will be grandfathered if PEMEX can demonstrate that it is currently exploring or producing such areas and has the financial, technical and performance capacity to continue with those areas. PEMEX will have the choice to migrate its allocations to the new types of contracts (which will be subject to a new, more favorable fiscal regime). In such cases, if PEMEX wants to contract with private parties, it will be the CNH that will handle the bid process and SENER and the Secretary of Treasury (Hacienda) that will establish the contracting, technical and fiscal terms of such contracts.
As to the issue of booking reserves, SPCs and/or private investors granted contracts for exploration and production activities will be able to “report” such contracts, and expected economic benefits therefrom, for accounting and financial purposes, but only as long as such contracts explicitly stipulate that all hydrocarbons within the subsoil remain the property of the state.
Minimum local content and other measures for promoting national participation in operations under the contracts will be mandated by laws to be subsequently enacted.
In addition, the decree provides for the creation of several government agencies mandated to oversee, control and regulate the energy sector, including:
- the National Agency for Industrial Security and Environmental Protection of the Hydrocarbons Sector (Agencia Nacional de Seguridad Industrial y de Protección al Medio Ambiente del Sector Hidrocarburos), which will regulate and oversee the installment and abandonment of facilities and the overall control of waste products from operations; and
- the National Center of Natural Gas Control (Centro Nacional de Control de Gas Natural), which shall be responsible for transportation and storage of natural gas and the operation of the national gas pipeline system.
A public trust denominated the Stabilization and Development Fund of Mexico (Fondo Mexicano del Petróleo para la Estabilización y el Desarrollo) will also be established with the Mexican Central Bank, which will be entrusted with receiving, managing and distributing the profits resulting from the hydrocarbon exploration and production contracts, with the exclusion of taxes.
Reforms specific to electric power
The state will maintain exclusive ownership and control of SPCs that carry on activities which the Constitution defines as strategic, such as the planning and control of the national electric power system and the public service of transmission and distribution of electric power. However, private investors will be permitted to participate in all other activities within the electric power industry.
The decree creates the National Centre for Energy Control (Centro Nacional de Control de Energía), which shall be responsible for operating the electric power wholesale market and distribution network.
It is also provided in the decree that, in respect of electric power, Mexican laws shall implement clean energy requirements and mandate reductions of polluting emissions. For example, the decree requires that the Executive propose a strategy to the National Program for the Use of Sustainable Energy (Programa Nacional para el Aprovechamiento Sustentable de la Energía) to promote the use of cleaner technologies and fuels within 365 days of the publication of the decree. The same provision establishes that Congress shall pass a law regulating the recognition, exploration and exploitation of geothermal resources for use as a form of renewable energy.
This decree represents a landmark in the history of the energy sector in Mexico and promises to greatly open up the country’s hydrocarbon and electric power industries to private investment – both national and foreign. However, the full extent and impact of such reforms will not be known until the details are presented in more specific secondary legislation and model form contracts establishing the required framework for such investment. The decree is a significant first step, but will demand tremendous and continued legal restructuring efforts after enactment in order to bring the promise of the reforms to fruition.