The Mexican hydrocarbons industry was closed to private sector participation from 1938 until December 16, 2013, when the Federal Constitution was amended to open all segments of the industry to competition. This reform was designed to allow Mexico to significantly increase its hydrocarbons production and reserves in a competitive environment. With approximately 24,806 mmboe of 2P reserves and 105,361 mmboe of prospective resources and many unexplored basins, Mexico should become one of the most attractive jurisdictions worldwide for private investment in the hydrocarbons sector. The first exploration and extraction contracts will be awarded by the end of 2015, thus generating significant levels of foreign investment and economic activity, not least into the country’s prospective shale gas basins.
Shale play details and status
In December 2013, Mexico amended its Federal Constitution to implement a new energy reform, one of several structural reforms proposed by the President in order to modernise the country. The pressing need for Mexico to develop new energy sources was a key driving force in this process, which ended the State monopoly in the hydrocarbons sector and allows private investment and participation in all areas of the hydrocarbons industry.
Mexico has large prospective shale gas and shale oil resources along the Gulf of Mexico Basin, since the prolific Eagle Ford shale formation in Texas extends into Mexico and accounts for two-thirds of Mexico’s shale gas resources.
According to the Mexican Energy Secretariat (SENER), which is in charge of managing and regulating all means of energy within the country, the national oil company, Petróleos Mexicanos (PEMEX), began the systematic assessment of shale resources in 2010. As a result, the potential to produce hydrocarbons from shale was identified in the following geological provinces: Chihuahua, Sabinas-Burro-Picachos, Burgos, Tampico-Misantla and Veracruz.1
Shale gas was produced by PEMEX for the first time in March 2011, in Coahuila state, in a formation that is part of the Eagle Ford area. PEMEX estimated Mexico’s shale gas potential in the range of 150 to 459 trillion cubic feet (TCF), with an average resource of 297 TCF (equivalent to approximately 60 billion barrels of oil) within a prospective area of 43,000km2.
According to an Inter-American Development Bank discussion paper on shale gas in Latin America, (which considered a study by Advanced Resources International), Mexico has the second largest technically recoverable shale gas deposits in Latin America. This ranks it among the largest in the world.2 At the end of 2013, the expectation was that 150 wells would be drilled by 2016, and PEMEX had identified a budget of approximately US$200 million for shale gas development.3 The development of shale resources provides Mexico with a unique opportunity to increase its long-term production of hydrocarbons and its energy sustainability.
Ownership of land and mineral rights
The general rule, set out in Article 27 of the Mexican Federal Constitution, is that the State is the owner of the subsoil, as well as of all non-renewable resources located within it. Under the Federal Constitution, all natural hydrocarbon reservoirs in existence within the Mexican territory, whatever their nature, belong exclusively to the State and are also inalienable.
In order to comply with the subject matter of the entitlements (asignaciones)4 or contracts, State Productive Enterprises (SPEs) may enter into agreements with private parties. Provisions reiterating that the hydrocarbons in the subsoil are the property of the nation must be contained in the entitlements to SPEs and in the exploration and extraction contracts (E&E contracts) awarded to SPEs or private investors.
SPEs or private investors granted contracts for exploration and production activities will be able to ‘report’ such contracts, and the expected economic benefits from them, for accounting and financial purposes. However, this only applies if such contracts explicitly stipulate that all hydrocarbons within the subsoil remain the property of the State.
Under Mexican law, ownership of land, which may belong to any particular individual or entity, is different from ownership of the subsoil and the natural resources located within it. The State may grant exploration and extraction rights over such natural resources without involving the transfer of property land rights.
Under the Hydrocarbons Law, hydrocarbons activities are deemed to be in the public interest and, accordingly, prevail over any other private or public activity that requires surface or subsoil use.
Companies granted hydrocarbons exploration and exploitation rights are not required to own the land where exploration and extraction activities are to be carried out. The Hydrocarbons Law authorises the establishment of legal easements or the necessary surface occupation or use of privately owned land by third parties.
The terms and conditions, including the considerations, for the acquisition, use, enjoyment or encumbrance of the land, property and rights needed to perform oil and gas-related activities are negotiated between the owners, possessors or holders of such land or property rights and the holders of entitlements or E&E contracts. Such terms may be enforced by the Agrarian Law Office when required.
On December 16, 2013, the Mexican Federal Congress approved the Energy Reforms Decree, which amended Articles 25, 27 and 28 of the Federal Constitution and included 21 transitory provisions that further develop the constitutional reforms and contain other energy policy measures. All rules contained in the Energy Reforms Decree constitute the boundaries that govern the changes that can be made at the secondary legislation level. The Energy Reforms Decree came into force on December 21, 2014, the day after its publication in the Official Journal of the Federation (Diario Oficial de la Federación, or DOF).
The amendments to the Federal Constitution allow investors, whether national or foreign, to participate in the exploration, production and refining of hydrocarbons.
Prior to the enactment of the Energy Reforms Decree, PEMEX exclusively carried out hydrocarbons exploration and extraction activities. The private sector had a limited supporting role, consisting of providing services to PEMEX. Private sector participation in natural gas upstream activities began in 2004 through multiple service contracts. Several companies entered into these as integrated services contractors to PEMEX Exploración y Producción (PEP).
The E&E contracts contemplated in Article 27 of the Federal Constitution are granted by the National Hydrocarbons Commission (Comisión Nacional de Hidrocarburos, or CNH) under competitive bidding processes. CNH has the assistance of SENER, and of the Treasury and Public Credit Secretariat (Secretaría de Hacienda y Crédito Público, or HACIENDA), which establishes the economic conditions for the bidding processes and the fiscal terms of the E&E contracts. Its purpose is to allow the nation to obtain, in time, revenues that will contribute to its long-term development.
To implement the opening of the hydrocarbons sector, under the Third Transitory Provision of the Energy Reforms Decree, PEMEX was mandated to become an SPE within a period of two years, in accordance with applicable Mexican laws.
The secondary legislation package included eight new laws and the amendment of 13 pre-existing laws. On October 31, 2014, regulations were issued for seven existing and new laws.
SENER is responsible, among other things, for the overall regulation of the energy sector, issuing policies relating to hydrocarbons exploration and extraction activities, overseeing upstream activities, carrying out energy planning for the mid and long term, and determining the economic and social directives applicable to the national energy sector. It establishes the technical parameters that must be obeyed in CNH’s bidding processes, establishes the technical design of E&E contracts, and defines exploration and extraction areas and the type of contract awarded.
Under the Hydrocarbons Law, SENER’s powers include the following:
- Selecting the contract areas for E&E contracts, with the assistance of CNH
- Granting, modifying and revoking entitlements
- Authorising the assignment of entitlements by PEMEX to another SPE
- Issuing the technical guidelines for the bidding processes of alliances or associations with legal entities5, when PEMEX or other SPEs request the migration of the entitlements
- Fixing the mandatory participation of PEMEX in E&E contracts over blocks that have the potential for discovery of transboundary reservoirs
- Issuing the guidelines for public policy regarding hydrocarbons, petroleum products and petrochemicals.
HACIENDA is in charge of managing and controlling the Federal Government’s economic policy in financial, fiscal, expenditure and public debt matters. It is responsible for collecting taxes and verifying the correct payment of royalties from hydrocarbons production. Under the Hydrocarbons Law, HACIENDA sets the economic conditions for the different E&E contracts, and determines the variables for awarding E&E contracts in bidding processes carried out by CNH, among others.
- Setting the economic conditions pertaining to the tax conditions of the E&E contracts
- Determining the variables for awarding the E&E contracts in the bidding processes
- Participating in the administration and accounting audit regarding the tax conditions of the E&E contracts
- Issuing its opinion to SENER regarding the unitisation of extraction fields or reservoirs.
CNH is a decentralised agency of the Federal Government, which regulates and supervises the extraction of hydrocarbons. It has the technical capacity to define the expansion plans of Federal Government, and has authority over the annual investment programmes and operations contracts for the exploration and extraction of hydrocarbons. CNH’s jurisdiction over energy projects ends at the point of delivery. (So, in the case of oil, for example, its jurisdiction ends with delivery to a pipeline or storage facility.)
CNH also authorises recognition and surface exploration works and carries out seismic and geological studies. It provides technical support to SENER for the selection of the entitlement areas. It approves the exploration and development plans for entitlements. It conducts the bidding process for the award of E&E contracts and the alliances or associations of PEMEX or other SPEs with legal entities, if entitlements migrate to E&E contracts.
Under the Hydrocarbons Law, CNH’s powers include the following:
- Entering into E&E contracts with PEMEX, other SPEs or legal entities
- Providing technical support to SENER for the selection of the entitlement areas
- Carrying out the technical management and supervising the observance of the terms and conditions of the entitlements
- Approving the exploration and development plans for entitlements, and their modifications
- Conducting the bidding process for the alliances or associations of PEMEX or other SPEs with legal entities, in the cases of entitlements that migrate to E&E contracts
- Authorising the entering into of alliances or associations in which the contractor’s corporate or administrative control, or the control of operations in the contract area, are assigned, in whole or in part
- Issuing the regulations and supervising their observance by entitled parties, contractors or authorised parties in respect of the matters under its jurisdiction
- Approving the exploration plans or extraction development plans submitted by entitled parties and contractors.
National Centre for Natural Gas Control
The National Centre for Natural Gas Control, a new government agency, is responsible for transportation and storage6 of natural gas and for the operation of the national gas pipeline system.
Under the Hydrocarbons Law, the Energy Regulatory Commission (CRE) regulates and grants storage, transport and pipeline distribution permits. It approves the bases for the bidding processes conducted by the National Centre for Control of Natural Gas. It approves (with the favourable opinion of SENER) the creation of integrated systems. It renders its opinion on the planning of the expansion of transportation and distribution of natural gas and liquefied petroleum gas, in accordance with the guidelines for this purpose issued by SENER, among others.7
The National Agency for Industrial Safety and Environmental Protection in the Hydrocarbons Sector (ANSIPA) is a new government agency. It regulates and supervises operational safety and environmental protection, which involves overseeing the installation and abandonment of facilities and the overall control of waste products from hydrocarbon-srelated operations.
According to Article 5 of the ANSIPA Law, ANSIPA will have 30 attributes, among which the most relevant are to:
- Issue the technical measures within the scope of its competence, in order to deal with emergencies, critical risk situations or events that may cause serious damages to persons, property and the environment. If necessary, ANSIPA requests the support of the competent authorities to apply such measures.
- Issue the bases and criteria for the regulated parties to adopt the best practices for industrial safety, operating safety and environmental protection that may be applicable to the sector’s activities.
- Set the guidelines for the structuring and operation of the administration systems.
- Impose safety or enforcement measures, and penalties that may be applicable according to the relevant legislation.
Mexican Stabilization and Development Fund
Under Article 28 of the Federal Constitution, a public trust denominated the Stabilization and Development Fund of Mexico (Fondo Mexicano del Petróleo para la Estabilización y el Desarrollo) (the ‘Oil Fund’) will be established by HACIENDA with the Mexican Central Bank. This is a fiduciary institution, entrusted with receiving, managing and distributing the revenues resulting from entitlements and E&E contracts, with the exclusion of taxes.
Rights, licences and approvals
Surface surveying and exploration activities
Article 37 of the Hydrocarbons Law allows the conduct of surface surveying and exploration8 activities (which require the authorisation of CNH) to persons that do not have an entitlement or an E&E contract. The authorisation to carry out these activities does not grant exploration rights, or preferential rights with regard to entitlements or E&E contracts.
Permits required under the Hydrocarbons Law
The Hydrocarbons Law establishes permit requirements for industrial and logistic activities throughout the hydrocarbons exploration, extraction and supply chain. This law includes provisions relating to the permit application process, suspension and revocation, among others.
According to Article 48 of the Hydrocarbons Law, a permit will be required for the treatment and refining of oil, processing of natural gas, and exporting and importing of hydrocarbons, liquefied petroleum gas, petroleum products9 and petrochemicals. These permits are issued by SENER.
Article 48 also specifies that a permit will be required for each of the following activities: transportation, storage, distribution, compression, liquefaction, decompression, regasification and retail sales of hydrocarbons, petroleum products and petrochemicals. These permits are issued by CRE.
According to Article 49 of the Hydrocarbons Law, the terms and conditions of the permit required for the marketing of hydrocarbons, petroleum products and petrochemicals in Mexico sets out specific obligations for traders. (The permit itself may be granted by CRE under Article 48 of the Hydrocarbons Law.)
The parties interested in obtaining the permits referred to above, and contained under Title Three of the Hydrocarbons Law, must submit their application or request to SENER or to CRE, as the case may be, in accordance with the criteria established in Article 50 of said law. Article 51 specifies that permits will be granted in accordance with the Hydrocarbons Law Regulations, and may be terminated or cancelled owing to any of the eight causes set out in Article 54 of the Hydrocarbons Law.
Article 53 of the Hydrocarbons Law sets forth that the assignment of the permits or of the performance of the activities regulated thereunder may only be made with the prior authorisation of SENER or CRE, as the case may be. Authorisation requires that the permits are in force, the assignor has fulfilled all its obligations, and the assignee meets the requirements to be a permit holder and undertakes to comply with the terms of the obligations contemplated in said permits.
SENER or CRE, depending on the type of permit, will decide within a term of 90 calendar days following the date on which the assignment approval request is made. If a resolution is not issued by SENER or CRE, as the case may be, within the foregoing term, it shall be deemed to have approved. Any assignment made without observing the provisions of Article 53 shall be null and void.
Under Article 58 of the Hydrocarbons Law, the activities and services that are covered by a permit are deemed to be in the public interest.
Article 85 of the Hydrocarbons Law provides for an extensive list of sanctions resulting from the violation of some of the permits mentioned above.
Establishment of the local entity and Central Bank requirements
In general terms, under Mexican corporate law a corporate vehicle must be incorporated in order to operate any kind of trade or business in the country. Such vehicle may be either a local branch of a foreign company or a local Mexican company. However, the Hydrocarbons Law requires that private holders of E&E contracts be legal entities, organised pursuant to the laws of Mexico10. As such, foreign investors will be required to organise local subsidiaries (whether a partnership or corporation) in order to participate. The same requirement applies to private investors that enter into associations with PEMEX.
Subject to the foregoing caveat, there are different structures that investors may use for investment vehicles in Mexico. They range from setting up a commercial corporation or branch to forming a joint venture or trust. The General Corporation Law recognises the existence of six types of commercial organisations or structures. However, in daily corporate practice in Mexico, the type of company most utilised is a limited liability stock corporation or a limited liability company.
The General Corporation Law provides that a foreign company has legal existence and is entitled to set up branches in Mexico when it is recorded in the Public Commercial Registry in the location where it intends to set up the branch. It must obtain the prior authorisation of the Department of Foreign Affairs and Department of the Economy. In order to obtain such authorisations, among other requirements, the foreign company must prove that it has been incorporated in accordance with the laws of its country and that its charter and by-laws contain no provisions that are contrary to Mexican law.
In order to obtain authorisation from the Department of Foreign Affairs to open a branch office, it is necessary to file a notice in which the company waives its right to invoke the protection of its government in matters related to the acquisition of ownership of property in Mexico.11
Under Mexican laws, there are no exchange controls on the import or export of capital. Foreign currencies may be bought and sold freely and there are no restrictions on the maintenance of foreign currency bank accounts in Mexico.
Pursuant to the Foreign Investment Law, foreign investors receive the same legal treatment as local investors, and are able to invest in major economic activities in the country.
State participation, taxes, duties, royalties and incentives
Under Article 18 of the Hydrocarbons Law, the consideration established in the E&E contracts will be subject to the provisions of the Hydrocarbons Revenues Law (Article 1). This sets the system for the revenues to be received by the State as a result of hydrocarbons exploration and extraction activities carried out under the entitlements and contracts12 referred to in Article 27, Paragraph 7 of the Federal Constitution and in the Hydrocarbons Law, as well as the consideration13 to be set forth in the contracts.
The forms of consideration provided for in the E&E contracts will be calculated and delivered to the State and the contractors according to the mechanisms set forth in each E&E contract, and following the rules set out in the Hydrocarbons Revenues Law. The payment to the State of this consideration does not exempt contractors from complying with their tax obligations as set out in the Income Tax Law and other tax provisions (Hydrocarbons Revenues Law, Article 4).
Contract fee for the exploration stage
In each licence contract, profit-sharing contract and production-sharing contract, there will be included a monthly payment in favour of the State on account of the contract fee for the exploration stage.
This fee is applied on the basis of the portion of the contract area pursuant to the E&E contract that is not in the production stage, according to specific rates.14 The rates are updated in January every year, according to the variations in the National Consumer Price Index for the immediately preceding year (Hydrocarbons Revenues Law, Article 23).
Each licence contract, profit-sharing contract and production-sharing contract will include a monthly payment in favour of the State on account of royalties. The amount of the royalties is determined, for each type of hydrocarbon, by applying the relevant rate to the contract value of oil,15 the contract value of natural gas16and the contract value of condensates17, as the case may be (Hydrocarbons Revenues Law, Article 24).
Tax on hydrocarbons exploration and extraction activities
Contractors are obliged to pay a tax on the hydrocarbons exploration and extraction activities in the contract area defined in the relevant E&E contract (Hydrocarbons Law, Article 54). This tax is calculated on a monthly basis, applying specific fees18 per square kilometre comprised in the contract area (Article 55).
The contractor will determine the tax per month or fraction thereof, and must pay it no later than the 17th day of the immediately following month. The tax provisions and the general rules issued by the Tax Administration Service apply (Hydrocarbons Law, Article 56).
Considerations under licence contracts
Pursuant to the Hydrocarbons Revenues Law, licence contracts provide for the following types of consideration in favour of the State:
- a signing bonus
- the contract fee for the exploration stage
- royalties (determined in accordance with Article 24 of the Hydrocarbons Revenues Law)
- a contractual consideration derived from the application of a rate to the hydrocarbons’ contractual value.19
The signing bonus is determined by HACIENDA for each E&E contract. The amount and payment conditions will be included in the bidding conditions for the award (in the case of a new award) or in the E&E contract itself (in the case of a contract resulting from the migration of an entitlement). The signing bonus will be paid in cash by the contractor to the State through the Oil Fund (Hydrocarbons Revenues Law, Article 7).
The other considerations in favour of the State, set forth in the licence contracts, are paid monthly in cash by the contractor, as provided for under the E&E contract (Hydrocarbons Revenues Law, Article 8).
The mechanisms for determining the amounts of the royalties and the contract fee for the exploration stage are common to all licence contracts, profit-sharing contracts and production-sharing contracts.
The rate (or mechanism for determining the rate) to be applied to the hydrocarbons’ contractual value for determining the amount of the contractual consideration is set out in the applicable licence contract.
In order to allow the State to capture ‘extraordinary profits, if any, generated by the Extraction of Hydrocarbons’ this rate is modified through an adjustment mechanism included in the licence contract (Hydrocarbons Revenues Law, Article 10). The mechanism is a formula set by HACIENDA for each E&E contract. It increases the consideration in favour of the State, based on the profitability of the contractor in each period, by modifying any of the parameters that determine the consideration paid under the E&E contract (Hydrocarbons Revenues Law, Article 3(X). The amount of this contractual consideration will not be known until the release of the bid conditions and model contract for any contract area. The rate applied in such determination may be a candidate for a bid variable in any bidding process to award same.
In the migration of areas under entitlements to the licence contract scheme, HACIENDA will define the consideration to the State described above, ensuring that the revenues for the State over time are not lower than those that would have been obtained under the original entitlement.
The consideration in favour of the contractor under licence contracts will be the transfer of the hydrocarbons after they have been extracted from the subsoil, in accordance with the contract, as long as the contractor duly complies with its consideration payment obligations.
Considerations under profit-sharing contracts
Profit-sharing contracts will set out the following types of consideration in favour of the State (Hydrocarbons Revenues Law, Article 11):
- The contract fee for the exploration stage.
- Royalties (determined in accordance with Article 24 of the Hydrocarbons Revenues Law).
- Consideration to be determined by applying a percentage to the operating profit.
The operating profit is determined for each period by deducting from the hydrocarbons’ contractual value:
- The amount of royalties actually paid by the contractor during the period, and
- The consideration corresponding to cost recovery, determined pursuant to Article 16 of the Hydrocarbons Revenues Law.
The percentage (or mechanism for determining the percentage) of the operating profit to be allocated to the State is not specified in the Hydrocarbons Revenues Law. It will presumably be set out in the applicable profit-sharing contract (and/or the bidding conditions for the award of such contract), and may be a prime candidate for a bid variable in any bidding process to award same.
The State will capture ‘extraordinary profits, if any, generated by the Extraction of Hydrocarbons’ by amending the percentage of operating profits allocated to the State through an adjustment mechanism to be included in the profit-sharing contract (and/or the bidding conditions for the award of such contract). This will operate in the manner described above for considerations under licence contracts (Hydrocarbons Revenues Law, Article 15).
The consideration in favour of the contractor in profit-sharing contracts will be (Hydrocarbons Revenues Law, Article 11):
- The recovery of costs, subject to the provisions of Article 16 of the Hydrocarbons Revenues Law.
- The remainder of the operating profit after covering the consideration in favour of the State.
The consideration in favour of the contractor for recovery of costs will be the amount that is equivalent to the costs, expenses and investments recognised in accordance with the guidelines for this purpose issued by HACIENDA on March 6, 2015 (Hydrocarbons Revenues Law, Article 16).
Article 19 of the Hydrocarbons Revenues Law enumerates 15 items of cost, expense or investment that are expressly not recoverable. These include:
- Those in excess of reference or reasonable market prices, as established in the rules and bases for the registration of costs, expenses and investments under the E&E contract.
- Those that are not strictly essential for the activity subject to the E&E contract, any others specified in each E&E contract because of particular circumstances or situations, and those established in the guidelines issued for such purpose by HACIENDA (Hydrocarbons Revenues Law, Article 19 (XIV) and (XV)).
The consideration received by the contractor for recovery of costs in any period will not exceed the ‘cost recovery limit’. The ‘cost recovery percentage’ used in determining the cost recovery limit will be set by HACIENDA in the bidding conditions and/or the applicable E&E contract. The costs, expenses and investments recognised for cost recovery purposes that are not recovered by the contractor in any period as a result of the application of the cost recovery limit are carried forward indefinitely for recovery in subsequent periods (Hydrocarbons Revenues Law, Article 3 (IX) and (XII) and Article 16).
Under profit-sharing contracts, contractors are required to deliver the total contractual output20 to the trader21, who will deliver the income resulting from the marketing thereof to the Oil Fund. In turn, the Oil Fund will retain the consideration due to the State and will deliver to the contractor the consideration to which it is entitled for each period, according to the provisions of the E&E contract (Hydrocarbons Revenues Law, Article 11).
Considerations under production-sharing contracts
Production-sharing contracts will set out the following types of consideration in favour of the State (Hydrocarbons Revenues Law, Article 12):
- the contract fee for the exploration stage
- royalties (determined in accordance with Article 24 of the Hydrocarbons Revenues Law)
- a consideration to be determined by applying a percentage to the operating profit.
The operating profit is obtained as described in the section on profit-sharing contracts, above.
The State will capture ‘extraordinary profits, if any, generated by the Extraction of Hydrocarbons’ by amending the percentage of operating profits allocated to the State through an adjustment mechanism to be included in the production-sharing contract (and/or the bidding conditions for the award of such contract) (Hydrocarbons Revenues Law, Article 15).The adjustment mechanism operates in the manner described in the section on licence contracts above.
The consideration in favour of the contractor in production-sharing contracts will be (Hydrocarbons Revenues Law, Article 12):
- the recovery of costs, subject to the provisions of Article 16 of the Hydrocarbons Revenues Law
- the remainder of the operating profit after covering the consideration in favour of the State.
The consideration in favour of the contractor for recovery of costs will be the amount that is equivalent to the costs, expenses and investments recognised in accordance with the guidelines for this purpose issued by HACIENDA (Hydrocarbons Revenues Law, Article 16).
- In regard to the costs that are not recoverable and the consideration received by the contractor for cost recovery, please refer to the section on profit-sharing contracts above.
Considerations under service contracts
Under service contracts, the contractors deliver the entire contractual output to the State. The consideration in favour of the contractor will always be in cash and will be set out in the applicable contract, considering the standards and usage of the industry.
The consideration in favour of the contractor set out in a service contract is paid by the Oil Fund out of the revenues generated by the marketing of the contractual output derived from each service contract (Hydrocarbons Revenues Law, Article 22).
Environmental protection and socio-economic development
Mexico has a broad set of regulations distributed among government and administrative authorities in charge of defining policies for specific areas. The General Law on Ecological Equilibrium and Environmental Protection (LGEEPA) of 1998 defines policy guidelines that must be followed by the Secretariat of the Environment and Natural Resources (SEMARNAT), the main regulatory agency on environmental matters in Mexico, in charge of ensuring the protection, conservation and proper use of natural resources.
The section on government agencies above describes the powers and attributes of ANSIPA, which was created as part of the Energy Reforms Decree.
Enforcement regime, and judicial and arbitral alternatives
The administration of justice in Mexico is regulated under Article 94 of the Federal Constitution, which provides that the judicial power of the Federation is divided among the Supreme Court of Justice, the Electoral Tribunal, the Constitutional Tribunal, Circuit Collegiate and Unitary Courts, and District Courts. The Supreme Court is the highest court for criminal, labour, civil and commercial matters.
Under Article 21 of the Hydrocarbons Law, all disputes pertaining to E&E contracts, except for disputes under Article 20 pertaining to the administrative rescission of the E&E contract, may be settled through the application of alternative dispute resolution mechanisms. These include arbitration agreements upon the terms set forth in the Fourth Title of the Fifth Book of the Mexican Commercial Code and international treaties regarding arbitration and the settlement of controversies to which Mexico is a party.
The exclusion of disputes pursuant to Article 20 is significant, as it provides that declarations of administrative rescission by CNH are not subject to arbitration and that the contractor’s only recourse in such circumstances is to the Mexican courts.
Article 21 of the Hydrocarbons Law sets forth more details on the arbitration, stating that: CNH and the contractors shall in no event submit to foreign laws; and that, in any event, the arbitration procedure will always abide by specific provisions, contained therein.
There is a significant concern with the limited scope of the dispute resolution provision contemplated in Article 21 of the Hydrocarbons Law. Article 20 contemplates administrative rescission and, under Article 21, it is not possible to submit controversies related to any of the serious causes under Article 20 to arbitration. If CNH alleges a serious breach, the contractor’s only recourse is to cure the alleged breach within the cure period or appeal through an internal procedure administered by CNH.
Moreover, there is a practical concern that arises when there is a breach that overlaps between serious causes and other provisions of the E&E contracts. Such overlap can give rise to competing claims in different venues being filed.
Lastly, there are no major issues regarding the rule of law and enforceability of contractual rights in Mexico. Domestic court decisions and arbitration awards are enforced by legal means available to the parties in litigation, such as executory proceedings.
Oil and gas players may be invited to Mexico as partners of PEMEX in existing Round Zero acreage (e.g. the migration of Round Zero entitlements to E&E contracts) or through bid rounds that CNH will organise in order to award E&E contracts for selected open acreage.
When participating in the bid rounds, private investors will be able to present individual bids or enter into joint ventures (such as joint bidding agreements) with other private investors and/or PEMEX and/or other SPEs in order to present joint bids.
Currently, PEMEX is expected to enter into farm-out agreements with private parties in order to establish ten joint ventures with upstream players in acreage that was awarded to PEMEX as a result of Round Zero. In this round, PEMEX was awarded:
- 100 per cent of the areas in production it requested
- 83 per cent of Mexico’s current proven and probable reserves
- 21 per cent of Mexico’s prospective resources.
This initiative will refer to fields that demand high capital investments, are technically complex or are good farm-out candidates as a result of other strategic considerations. Through these farm-outs, PEMEX seeks to accelerate development or increase production, access best practices and technologies and reduce its capital investment requirements or operational capabilities.
Round One was announced on August 13, 2014 and is the first of potentially multiple periodic bid rounds that CNH will organise. In the aggregate, this will represent opportunities for upstream players to obtain the rights to areas that were not awarded to PEMEX as a result of Round Zero. In this regard, the Hydrocarbons Law allows PEMEX and other SPEs to enter into alliances or associations during the bidding process for the award of E&E contracts. It is expected that 169 blocks will be offered in Round One, and these are to be awarded before September 2015. Of these, 109 blocks correspond to exploration projects and 60 to extraction projects.
According to the Seventh Transitory Provision of the Mexican Energy Reforms Decree, minimum local content and other measures for promoting national participation in operations under entitlements and E&E contracts is to be mandated by laws subsequently enacted.
The aggregate of hydrocarbons exploration and extraction activities performed pursuant to entitlements and E&E contracts must reach, on average, 35 per cent of national content. This goal does not apply to exploration and extraction of hydrocarbons in deep and ultra-deep waters (Hydrocarbons Law, Article 46), that will have specific goals set by the Economy Secretariat in accordance with the characteristics of such plays.
The entitlements and E&E contracts will establish a minimum national content percentage to be gradually met by the entitled parties and contractors. This percentage will be established by SENER, with the opinion of the Economy Secretariat. With regard to the E&E contracts, the goal for the degree of national content must be included in the conditions for the bidding and award of said contracts (Hydrocarbons Law, Article 46).
The minimum average percentage of national content set out in Article 46 of the Hydrocarbons Law will increase gradually, starting from 25 per cent in 2015 and reaching at least 35 per cent in 2025 (Hydrocarbons Law, Twenty-Fourth Transitory Provision).This goal will exclude deep and ultradeep water activities, for which the Economy Secretariat, with the opinion of SENER, will establish the values for 2015 and 2025, based on the national content study of said activities for the first semester of 2014.
Entitled parties, contractors and the permit holders referred to in the Hydrocarbons Law must provide information to the Economy Secretariat regarding the degree of national content of the activities they perform, according to the provisions issued for this purpose by the Secretariat (Hydrocarbons Law, Article 126).
If the Economy Secretariat determines that an entitled party or contractor has failed to meet the required national content, it will advise CNH so that the relevant penalties may be imposed, according to the provisions set in the entitlement or the E&E contract (Hydrocarbons Law, Article 46).