Amidst the social and political turbulence in Mexico, there is new Energy Reform legislation. The long ago promised, and greatly anticipated, reform has finally arrived, and now various companies around the world involved in the energy industry may be contemplating investment and business opportunities in Mexico. So, what is this reform about?
On December 2013, the Mexican federal government published in the Mexican Federal Register (Diario Oficial de la Federacion) the reform and amendments to the Mexican constitution. This publication was the first of “more to come” regarding changes to laws and regulations governing the energy industry.
Since 1938, and until these laws were amended, the hydrocarbons and electricity business activities were 100% controlled and operated by the state owned companies: Petroleos de Mexico (PEMEX) and Comision Federal de Electricidad (CFE), respectively. Private companies were banned from doing business with the government in any of these areas.
The legislation reform allows private companies, domestic, and/or international, to participate in some of the energy business activities in the country. For example, they may participate in the oil and hydrocarbons exploration and extraction (exploitation), as well as oil and natural gas processing and refining. Under this scenario, private companies may contract through alliances or partnerships and enter into shared profit, production, and service agreements with PEMEX. They may also obtain special government licenses to transport, store, distribute, (among other activities), hydrocarbons, oil byproducts and petrochemicals.
In regard to the electric energy, the Mexican government will continue controlling the transmission and distribution of power, however, private entities may now generate, produce, and trade electric power, geothermic and hydraulic, among other sources of energy. Private companies interested in participating will be required to comply with specific requirements. With due diligence, one should be aware of the tax issues, national content, profit sharing, contract negotiation, depreciation rates, transfer pricing, labor, subcontracting, among other factors that may be relevant for the success of their business in Mexico. Additionally, there are still some specifics that have yet to be published.
Based on the above information, the Mexican market might represent a potential business opportunity for Mexican and international investors. However, before formalizing any business agreement with a Mexican counterpart, investors must first put in place a business plan and strategy aimed at determining whether the existing legal, social, and economic conditions provide legal certainty to their investment and success of their business.