The Mexican Federal Congress has passed a few days ago Constitutional amendments that pave the way for a complete overhaul of the legal framework governing the energy sector in Mexico. The amendments have also been approved by the majority of the Legislatures of the 32 States into which Mexico is divided. Though mostly hailed for finally allowing private sector participation in hydrocarbon upstream activities, the amendment also deregulates downstream activities and allows participation in power generation and supply.

Pursuant to the new proposed energy constitutional framework, the Mexican State will continue to hold a monopoly of exploration and extraction activities, and all hydrocarbons in the subsoil shall continue to be originally owned by the nation. However, the State may enter into several types of contracts, such as production sharing, profit sharing, licenses and other types of service arrangements for private parties to perform E&P activities on account of the State. In the electricity field, private parties will be able to participate as generators. Transmission and distribution will still be controlled by the State through an entity other than the Federal Electricity Commission (CFE).

Pemex and the CFE will be converted into state productive companies (as opposed to its current status as decentralized government entities) and will be vested with sufficient autonomy to act as an independent operation (budgetary and operational independence). Among the most important features for the new Pemex and CFE (and other state productive companies that may be created), is the fact that compensation to employees will no longer be limited per constitutional restrictions to an amount not to exceed the President’s salary. Thus, employees will now be paid competitive salaries and bonuses, a feature that will allow Pemex and CFE to retain talent and where productivity is fostered and recognized. Further, Pemex and CFE employees will be subject to more flexible rules in terms of administrative flexibility, and the entities will be subject to more efficient procurement standards. These changes are designed to allow Pemex and CFE to compete with other companies to secure contracts from the State and to sell power in the wholesale market.

In the hydrocarbon area, both international oil companies and services companies will be able to enter into different types of contracts with the State in order to perform E&P activities for the State, to wit: (i) services; (ii) profit sharing; (iii) production sharing; and (iv) licenses (whereby contractor will be entitled to purchase from the State the corresponding produced oil). However, none of these agreements will grant contractors any ownership rights over production, and booking of benefits under the contracts will be permitted, as long as it is clearly stated that contractors have no rights over reserves.

Articles that are transitory in nature to the Constitutional amendment require the passing of full implementation laws within the year following the date when the amendment becomes effective, though the most substantial part of implementation laws must be passed within the initial four months.

The reform puts an end to 75 years of State monopoly in the sector and opens the door for private participation in what has been called by the press as the “mother of all Mexican reforms”. This is no overstatement and we shall be keeping a close eye on further developments to allow our clients to be fully informed of the steps in this complete new era for the energy sector in Mexico.