On April 30, 2014, President Peña Nieto presented several initiatives for secondary legislation to the Senate of Mexico as mandated by the recently reformed Constitution of the United Mexican States (the Constitution) enacted last year and published in the Official Journal of the Federation on December 20, 2013.

During a press conference, Secretary of Energy Pedro Joaquín Coldwell, and Secretary of the Treasury, Luis Videgaray Caso, announced that the aforementioned proposals are part a comprehensive package of 21 laws prepared by the Federal Executive pertaining to energy reform.

Following is an executive introduction to relevant provisions, mainly, those contained in the most pertinent proposed secondary laws: the Proposed Hydrocarbons Law, the Proposed Law of Petróleos Mexicanos (the Proposed Pemex Law) and the Proposed Law for Revenues on Hydrocarbons (the Hydrocarbon Revenues Proposed Law) (jointly the Proposed Laws).

The initiatives are structured in two main sections. In each case, there is a first section pertaining to the background, objectives and motivations of the Proposed Laws, and a second part which contains the actual bills.

Proposed Hydrocarbons Law

Pursuant to the provision contained in its first article, the Proposed Hydrocarbons Law will regulate Constitutional articles 25, 4th paragraph; 27, 7th paragraph; and 28, 4th paragraph, regarding matters of hydrocarbons.

There are 123 articles and 28 Transitory Provisions in the Proposed Hydrocarbons Law, and in accordance with its Second Transitory Provision, when enacted, it will repeal the Law Regulating article 27 of the Constitution in the petroleum sector.

Proposed Pemex Law

The Proposed Pemex Law will provide regulation for Constitutional article 25, 4th paragraph, and the Twentieth Transitory Provision of the Decree by which the Constitution was reformed in matters of Energy.

There are 104 articles and 18 Transitory Provisions in the Proposed Pemex Law, and, in accordance to its Second Transitory Provision, when enacted, it will repeal the Law of Pemex published in the Official Journal of the Federation on November 28, 2008.

Hydrocarbon Revenues Proposed Law

The Hydrocarbon Revenues Proposed Law will provide regulation for the revenues derived from the exploration and extraction activities referred to in Constitutional article 27, 7th paragraph, as well as those payments originating from contracts.

There are 70 articles and six Transitory Provisions in the Hydrocarbon Revenues Proposed Law.

Exploration and Extraction of Hydrocarbons

The Mexican Nation will carry out all Exploration and Extraction of Hydrocarbons. The following are possible structures for private participation in the pursuit of such activities.

Asignaciones

According to the Proposed Hydrocarbons Law, Asignación is the administrative act of granting the assignee, Petróleos Mexicanos (PEMEX) or any other State Productive Company, the exclusive right to develop Exploration and Extraction activities in a determined area of a specific depth, for a finite duration.

Asignaciones are granted, exceptionally, by the Secretary of Energy (SENER). Their exceptional character mandates that SENER argue the reasons why an Asignación must be granted and seek its approval from the National Hydrocarbons Commission (CNH). The provisions of the Hydrocarbons Law on the procedure that the Federal Executive must follow do not apply to Round Zero, as the Round Zero process was regulated in the Constitutional Reform of 2013. The Asignaciones granted to Pemex under Round Zero will be governed by the Hydrocarbons Law.

PEMEX may assign an Asignación of its own to another State Productive Company. SENER has the power to revoke Asignaciones in certain cases.

Service Contracts

A State Productive Company which legitimately holds an Asignación is able to develop all related activities through contracts with other parties only through the execution of service contracts. This excludes Exploration and Extraction Contracts.

PEMEX must select service providers by open contest, through public procedures. There are, however, 22 cases where the Proposed Pemex Law allows PEMEX to avoid public contests. In such exceptional circumstances, PEMEX may pursue restrictive invitations and/or direct award.

Migration of Asignaciones

PEMEX and other State Productive Companies will be able to migrate an Asignación that each legitimately holds, into a Contract for Exploration and Extraction, for the purposes of changing the fiscal regime and, in such cases, enter into Alliances or Associations with private investors. This migration has to be approved by SENER, in consultation with CNH and the Treasury. For the selection of such alliance or association partners, CNH (not PEMEX) has to actually run the bid.

Exploration and Extraction Contracts

The Proposed Hydrocarbons Law made a significant change in terminology compared to the terms used in the Constitutional Reform of 2013 with regard to the types of Contracts that are available to private investors.

The fourth transitory provision of the Decree reforming the Constitution established that the types of contracts available to investors are, among others, service contracts, production or profit-sharing contracts, and/or licenses. The Proposed Law for Revenues on Hydrocarbons does mirror this list of contracts and regulates in detail their fiscal terms.

In contrast, the Proposed Hydrocarbons Law refers to Service Contracts, Alliances and Associations among private investors and State Productive Companies, and Exploration and Extraction Contracts (which are the true E&P granting instruments along with the Asignaciones).

Exploration and Extraction Contracts are defined by the Proposed Hydrocarbons Law as legal acts by which the State of Mexico, acting through CNH, grants a Contractor the right to conduct Exploration and Extraction activities in a Contractual Area and for a specific period of time.

CNH must observe guidelines provided by SENER and the Treasury in order to execute such contracts. Parties to these contracts will bid their offers. The Hydrocarbons Law will regulate the entire bidding process. Under the Proposed Law for Revenues on Hydrocarbons, in all cases the award variable will be economic seeking always to maximize revenues for the State.

Assignees and Contractors will have the right to report, for accounting and financial purposes, the Asignación or Contract for Exploration and Extraction, as well as the benefits expected from such agreements, as long as they express that the hydrocarbons in the subsoil are property of the Mexican State.

CNH may rescind Exploration and Extraction Contracts for any of the nine reasons provided for in the Proposed Hydrocarbons Law.

Mandatory State Participation

The participation of the Mexican State is only mandatory in certain cases.   

For transboundary reservoirs, in which case such State participation will be set at a maximum of 20%. These situations will be regulated by the agreements operating them, and international treaties subscribed by Mexico.

Also, in accordance with the terms and guidelines for bidding Exploration and Extraction Contracts, the mandatory participation of the Mexican State (through PEMEX or other State Productive companies or a financial vehicle) may be required when (i) a Contractual Area subject to bidding coexists, at different depths, with an Area of Asignación, (ii) there are opportunities to promote the transfer of knowledge and technology, or (iii) certain projects are intended to be promoted by a special financial vehicle of the Mexican State. In cases one and three above, the mandatory State participation cannot be greater than 30%.  

Permits

There are several activities that require prior permits or the ex ante fulfillment of registration or other legal obligations, e.g., petroleum processing and refining, natural gas processing, and export and import of hydrocarbons, liquid petroleum gas, oil and petrochemicals, among others.

Sanctions

Chapter I, Title Four, of the Proposed Hydrocarbons Law contains two articles which provide for 39 cases where sanctions may be imposed.

National preference

Whenever under the same circumstances, including price, quality, and time of delivery, under the Proposed Hydrocarbons Law there must be preference towards the acquisition of local goods, and the contracting of “national” services.

Holders of Asignaciones and Contractors must individually meet a progressive minimum percentage of local content set out in the respective granting instrument.

Law and arbitration

Regarding potential disputes that may arise relative to Exploration and Extraction Contracts, arbitral clauses can be included in the contracts, in the terms of the Mexican Commercial Code and international treaties to which Mexico is party.

Likewise, CNH and Contractors will not be subject to foreign laws. Applicable law will be Mexican Federal Law and the process shall be conducted in Spanish.

Fiscal regime

The regime of revenues that the Mexican State will receive from activities relating to Hydrocarbons is established in the Hydrocarbon Revenues Proposed Law.