In 2013, Mexico’s President submitted an initiative to Congress to modify the Mexican Constitution to allow private parties to perform exploration and production activities in Mexico. The initiative also included liberalization of the power and electricity sector. The requisite amendments to the Constitution came into effect in December 2013, followed by further implementing legislation in August 2014. These reforms allowed private investment in the exploration and production of hydrocarbons, midstream and downstream activities, as well as in power generation, transmission, distribution and marketing activities. Such activities will now be carried out inter alia through permits granted and regulated by the Energy Ministry and/or the Energy Regulatory Commission.
This new legal framework offers a dispute resolution system based on both alternative dispute resolution and traditional methods, meaning that interesting arbitration and mediation cases are likely to arise from these new commercial relationships.
In this article, we outline the effects of the constitutional reforms on the Mexican energy industry and provide an overview of the relevant dispute resolution provisions involved in these reforms.
Following the reforms, PEMEX (a fully integrated oil company and the largest company in Mexico) is to remain a state-owned entity, but will be transformed into a "Productive State-owned Entity" whose main objective will be to produce revenues in a competitive and efficient manner, according to best international industry practices.
Further, the National Hydrocarbons Commission (the CNH) may now enter into profit-sharing agreements, production sharing agreements and/or license agreements to be awarded through a tender procedure to PEMEX, any other state-owned entity or private parties.
Power and electricity
The new electricity industry law allows the private sector to participate freely in the generation and sale of electricity, while leaving the electricity grid under the operational control of a state-owned agency.
The new electric industry law will create a new wholesale electricity market to be operated by the Centro Nacional de Control de Energía (CENACE), currently a unit within the Comisión Federal de Electricidad (CFE). CENACE will also become the independent system operator for the entire grid.
As with PEMEX, CFE will become a fully competitive entity as a Productive State-owned Entity and will be permitted to participate, through separate subsidiaries, in the different market activities.
THE DISPUTE RESOLUTION SYSTEM APPLICABLE TO THE ENERGY REFORMS
In 1993, Mexico enacted the Mexican Arbitration Statute into the Federal Commerce Code. This statute is almost identical to the UNCITRAL Model Law on International Commercial Arbitration and applies to both national and international arbitration where the seat of the arbitration is in Mexico. Mexico has also ratified the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (in 1971) and the Panama Inter-American Commercial Arbitration Convention (in 1978), and has entered into various bilateral and multilateral investment treaties.
Now that the energy sector is expected to grow significantly and bring about new business as a result of the recent reforms, arbitration and other ADR mechanisms will play an increasingly important role due to the flexibility, confidentiality and level of expertise that the forthcoming ventures will naturally require.
We summarize below the relevant dispute resolution provisions in the Energy reform legislation:
The Acquisitions and the Public Works Laws
These laws establish the regime for public works and state procurement. Although not applicable to energy matters, these laws promote the development of infrastructure that could be related to energy projects. The dispute resolution provisions include both conciliation and arbitration procedures. Conciliation between service providers/contractors and state entities is to be conducted before the Ministry of Public Administration.
An exception introduced in 2009 provided for the non-arbitrability of disputes concerning the administrative rescission or early termination of a contract by a state entity. Such unilateral rescission by a state entity is therefore not subject to arbitration.
The Hydrocarbons Law
This law provides that exploration and extraction agreements should contain a clause stipulating the applicable dispute resolution process for such agreements (which may include ADR procedures). In the case of arbitration, the procedure is to be conducted in Spanish, and the merits resolved under Mexican federal laws.
As described above, disputes concerning the unilateral termination or rescission of an agreement by the CNH are not amenable to arbitration and must be resolved by the federal Courts.
The Electric Industry Law
This law refers to a set of Market Rules (currently being drafted) which will stipulate the dispute resolution mechanisms applicable as between market participants and CENACE.
Article 79 of this law provides for a mediation procedure before the Ministry of Agricultural, Territorial and Urban Development in relation to the acquisition and/or use of land, goods or rights allocated to the electricity industry.
The PEMEX and CFE Law
These laws grant the Mexican federal courts jurisdiction to resolve domestic disputes where the CFE and PEMEX are a party. However, they also grant CFE and PEMEX (and their subsidiaries) the right to submit their disputes to arbitration and other ADR procedures.
Before the reform, CFE and PEMEX held the right unilaterally to rescind or terminate a contract (administrative rescission). Under this new regime, these contracts are deemed to be commercial agreements and are therefore regulated under commercial law.
The Public-Private Partnership Law
This law provides for the submission of disputes between the parties to a PPP to conciliation before the Ministry of Public Administration, an experts committee (similar to a dispute board procedure), and arbitration. In the case of arbitration, the applicable law is to be Mexican federal law and the procedure is to be conducted in Spanish.
Article 139 specifies that acts issued by the state are deemed an "act of State authority" and are therefore non-arbitrable.
Mexican energy reform is a movement of transnational importance, with consequences in the national, cross-border and international arenas for private and public sector companies and individuals. The dispute resolution system to be built around this reform will certainly offer interesting perspectives and chances to explore new settlement mechanisms. Lawyers and their clients should be prepared to face those opportunities. Knowledge of the technical aspects, together with skills for managing different kinds of dispute resolution mechanisms, will be crucial.