On 23 December 2013 Mexico enacted its long-awaited energy reform bill, sweeping aside the legislative gridlock that has dogged its previous attempts to move forward in this sector. The move is fundamental and bold, massively enhancing the opportunities for investment in Mexico and highlighting the country’s potential as a future heavyweight in the global energy market.
The constitutional changes approved by congress and the states of Mexico took effect on 1 January 2014. The step forward is momentous and high profile, though it is only the first in a series of steps to be climbed before Mexico can reap any reward. There remains significant work to be done. The hard graft for congress in 2014 will be the passing of key secondary legislation. There are a number of areas where the planned overhaul will need particularly careful stewardship.
One of these is the oil and gas sector, where the driving force will be to maximise the nation’s revenues. Implementing a contractual framework that gives legal certainty to private investors whilst maintaining state participation and oversight will require the same level of commitment as initially brought the reforms in. The responsibilities of the regulators will need clear parameters and the intentions of the state when it talks of “profit-sharing contracts”, “production-sharing contracts” and “licences” will need clarifying. Putting the heads of terms into a full-bodied contract is the next stage. Congress must pass the additional secondary laws within 120 calendar days of the final enactment of the reform for full implementation to occur.
Establishing the terms for private and foreign companies operating in Mexico’s oil and gas industry will also require a reassessment of the role of Pemex, the national oil company. Pemex is due to become a for-profit company that will compete with both domestic and foreign private companies. In the upstream sector, private parties will win contracts or licenses directly with the government or jointly with Pemex. Ownership of Mexico’s hydrocarbon reserves will remain with the state.
The potential harvest is enormous. JPMorgan Chase & Co forecast in November that scaling the 75-year-old barrier to investment in Mexican oil fields could increase foreign investment by as much as $15 billion annually. The power industry will also benefit. Private investment will for the first time since 1938 be permitted. As we discussed in a previous Law Now (“Mexico paves the way for overdue energy reform” – accessible here) President Pena Nieto’s reforms will split the power market into separate transmission, distribution and generation segments.
Mexico will need to harness the momentum it has created. Signing the reforms into law is the first step. The commitment looks firm, and the gains to be had are huge.
Woodhouse Lorente Ludlow is a Mexican law firm, recognised as a market leader in the energy and infrastructure sectors, which is now associated with CMS.