Last Monday, August 12, President Peña Nieto confirmed the submission of a bill with the Mexican Senate to amend the Constitutional restrictions on energy.  While the text of the amendments seems to be minor, its potential impact is substantial across the board: upstream and downstream hydrocarbon activities, as well as power generation. 

Oil and other hydrocarbons

The proposal maintains the restriction for the Mexican government to grant exploration and exploitation concessions (upstream activities).  However, the proposed amendment eliminates the restriction for the State to bid out contracts.  While a historical debate exists with respect to the exact nature and scope of what the restriction to grant contracts actually meant, for all practical purposes, it implied that production sharing or similar types of contracts were prohibited.   Based on such interpretation, Mexico has engaged in the exploitation of the oil and other hydrocarbons sector through the national oil company, Petroleos Mexicanos, with restricted private sector participation (mainly service agreements that allow for cash payments only, with no upside participation by contractors).

While the initiative includes specific statements on what President Peña Nieto’s intention is with respect to the future of the private participation in the sector, the Constitutional amendment provides that a secondary law must determine the manner and scope in which the State must exploit the hydrocarbon sector.   That is, the proposed Constitutional amendment is only a first step to a much anticipated mayor energy reform in Mexico.   The amendment does not change basic principles that have governed Mexico’s policy with respect to the hydrocarbon sector, such as the prohibition to grant concessions, and the undisputable domain of Mexico over the hydrocarbon resources.

In its presentation speech, Peña Nieto indicated that the intent is to pave the way for legislating different types of contracts that must make E&P activities more efficient, such as profit sharing contracts.  However, the extent and scope of the types of contracts the State will be able to enter into, must be determined by implementing legislation.

The proposal includes the liberalization of midstream and downstream activities, by eliminating the monopoly of the state in such activities.  The natural consequence will be that the State and the private sector will be able to participate in such activities (i.e., refining, natural gas processing, and oil and gas transport, storage and distribution), through the corresponding permits.

While the proposed amendment implies a significant change in Mexico’s energy policy, the implementing legislation must determine the actual scope of the sector’s opening and the opportunities that will be created for the private sector.

Electrical Power

The proposed Constitutional amendment also considers the opening of the electricity sector.  While current legislation already allows private generation through different types of permits, it disallows private sector working as utilities, as Mexico has the monopoly of such service through the Mexican Federal Electricity Commission.   Peña Nieto’s initiative intends to consider only transmission and distribution services as reserved for the State.  The State will maintain the control of the National Electric Grid, although it will be able to enter into contracts with the private sector.

The amendment also eliminates the monopoly of the State over electricity generation, thus allowing the private sector to generate power, allowing it to access the grid as part of the public service that will be maintained in the hands of the State.  To this end, the initiative contemplates the creation of an independent government entity in charge of the grid, ensuring proper access to the same.

Peña Nieto’s bill also states that secondary laws must determine the manner in which the reform will be implemented.  Consequently, while a mayor change in Mexico’s policy regarding power, the actual scope of the amendment and the specific manner in which private investment will be able to participate in the sector are still to be defined.  The implementing law is expected to include an acceleration to transition to clean energies.

Given the sensitive nature of the proposed Constitutional amendments, the initiative constantly evokes the actual intent of President Lázaro Cardenas’ expropriation of the oil industry back in 1938, and the actual laws that followed such expropriation, promulgated by President Cardenas himself, which allowed production sharing types of contracts.  

We will monitor the discussions in the legislative power, both with respect to this bill for Constitutional changes, and then in a crucial manner with the implementing legislation.