The Energy Reform’s bill adopted by a narrow margin on December 12, 2013 and which took effect on January 1st, 2014 finally formalizes the most liberal regime in the Nation’s history. Framed by the far reaching political agreement promoted by President
Peña at an early stage of his
administration “Pact for Mexico”
(Pacto por México), the scope of
the Reform was already established:
first and foremost, the hydrocarbons remain the Nation’s property; will be
extended the National Hydrocarbons Commission’s (CNH) faculties; will be
opened up to competition refining, petrochemistry and transportation; will
lower electricity production costs through gas; will set up energy supplying
in the country with reasonable prices and quality1; and, last but not least,
PEMEX will be converted into a public “Productive Company”.
To summarize, the Reform addresses three key aspects as follows:
Authorizing private investment for exploration and extraction of
hydrocarbons under contracts (i.e., Production Sharing Agreement)
with the Federal Government, as further exposed.
Authorizing oil processing and refining by private companies as
well as gas processing, oil and oil derivatives transportation, storage
And, authorizing private investment for electricity generation,
commercialization, transmission and distribution under contract with
CFE (Electricity Federal Commission).
1 See our publication about the Reform’s consequences for the Electricity Market - 2014
Hydrocarbons resources have always been carefully preserved and
maintained in a narrow strategic area. Nonetheless, the Energy Reform
cracked this historical shell to unfold a new oil & gas special strategic area
thus offering new business opportunities.
Despite the Reform’s innovating character, the core constitutional
reservation, stemming from the hydrocarbons ownership by the Nation and
therefore prohibiting concessions, remains intact.
Indeed, the Mexican Constitution rules the exploitation of the Nation’s
resources through different -relatively open- areas to private investment,
depending on the nature of the resource and the activity involved.
Four different contractual arrangements have been introduced:
Service Contracts, with a cash compensation;
Profit Sharing Contracts, with a compensation based on a percentage
Production Sharing Contracts, with a compensation based on a
percentage of production;
License Contracts, with a compensation through licensing in return
for payment for hydrocarbons extracted from subsoil. This feature,
which could be linked with the traditional concept of “permit”,
remains unknown in Mexican law. Moreover, the concept of “permit”
does not fully cover the meaning that the license aims to bear.
The bill’s final version also includes a fifth alternative allowing “any
combination of the aforementioned contracts”. In this respect, it is likely
that this provision may allow a wider flexibility and a greater similarity
with the concession model. However such flexibility depends on the legal
framework to be developed in the secondary legislation, expected by mid-
Indeed the participation in the oil and gas industry is not mandatorily
bound to these four pre-formatted models. Pemex is still entitled to
directly contract and/or subcontract third parties by means of standard
remunerated integrated services agreements or other standard forms. In
the same way, the farm-out model remains a managing option for Pemex,
depending on the strategic vs. non-strategic importance of each oilfield in
the framework of its E&P portfolio.
The Reform extends the private sector’s possibilities allowing for further
operative innovation in the entire upstream sector. As a combination
of contractual arrangements, compensation schemes and special fiscal
elements will be in effect shortly, it will be for the business community to
generate the business opportunities in the sector.
INTO A “PRODUCTIVE
According to the bill’s transitional clauses, PEMEX is expected to
progressively become, within two years, a “Productive Company” (along
with the Electricity Federal Commission, CFE). This transition has for
purpose to head toward a greater managerial and technical autonomy of
PEMEX, which would involve a special budget regime. Pemex would be
subject to financial balance as well as income taxes, as any other private
The distinction implies, first of all, a greater relief for Pemex as it will benefit
from a whole new governance approach and a tailor-made budget, and
secondly, greater revenue expectative for the federal government as the
private sector is likely to represent further economic value for the Nation.
However, this conversion inevitably forces Pemex to pass its oil & gas
traditional power to the new manager of the resource: the National
Hydrocarbons Commission (CNH), and the Energy Ministry, as the
country’s policy maker.
The institutional design rests on a trinity driven by the CNH in collaboration
with the SHCP (Tax Administration, in charge of tax conditions related to
public biddings and contracts) and the SENER (Energy Ministry, in charge
of area selection, technical design of contracts, and technical guidelines of
As per this new structure, CNH becomes the new key player in the Mexican
oil & gas industry being the new awarding authority for private companies
as well as for Pemex (organize public biddings, assignments, contract
executions, technical administration, and supervision of development
This collaborative scheme also includes the SEMARNAT (Environment
Ministry), which will act as a monitoring authority in the hydrocarbon
sector, via a specialized agency.
The Reform also brought a substantial modification with regard to the
counterparty since each contract should be signed with the Federal State
and no longer with Pemex. This means that, among other consequences,
the negotiation stage will be carried out without the participation of Pemex’s
Trade Union (STPRM), which came out strongly weakened of the Reform
as it has also been dismissed from Pemex’s governing bodies.
The new role that the CNH will carry out considerably diminishes Pemex
decision-making power. In fact, the CNH is in charge of two major duties:
Identify and authorize which fields Pemex may exploit and who may
accompany Pemex in their development, if Pemex so decides (Round
Determine whether or not a field should be opened to public bidding,
the awarding and management of the allocated fields (Round One and
Indeed Pemex will barely have a suggestion right as the CNH detains the
power to have the last word as for the fields’ assignments as well as for
the partnerships, when Pemex decides to migrate its exploratory titles
(asignaciones). In the same way, the contractual flexibility will mainly be
regulated by the CNH along with the SENER, which should be in charge,
among other matters, of the contracts’ technical design.
The oil revenues will be placed under control of the Bank of Mexico and
invested into a “Mexican Oil Fund”.
The fund will receive, upon tax payment, all revenues stemming from
hydrocarbon’s exploration and extraction. In this regard, a priority chain has
been designed to organize its distribution.
For that purpose, the contractor’s payment precedes any distribution. The
following elements, ordered by priority, will be: fixed Federal budget; sovereign
debt payment and long-term savings.
Finally, if the net income exceeds 0.15% of the GDP, an investment
program will be triggered (developments, projects, pensions).
As producing fields will be kept (due to public finance status quo), the Reform
allows a time-window to Pemex in order to select and submit to the CNH’s
approval, the exploratory fields of its interest. CNH would then grant Pemex
exploitation titles. (asignaciones).
The following main options are available to Pemex:
To request the migration of its exploitation titles into oil & gas contracts
(i.e. Production Sharing Agreement - PSA) in which Pemex would be
part to a Consortium with a Private Operator. Such Consortium would
then, execute the said Contract (i.e. PSA) with the Federation (via
To request exploitation titles without migration into oil & gas contracts.
In so doing Pemex can either continue using traditional service contracts
or enter into internationally-based oil & gas contracts (such as PSAs or
other risk-based contracts) conducting its own bid rounds;
In addition to the above mentioned options, Pemex has the right to migrate
its exploitation titles at any time (and not only during the Round Zero) with
the CNH’s approval. Further, when conducting Round One and onwards
the CNH might also decide to make the participation of Pemex mandatory.
In this regard, Pemex will also be required to meet the highest technical and
financial requirements for exploration fields. CNH has the right to revoke
Pemex’s exploitation title after five years, if the activity was proven unproductive.
ROUND ONE AND
The CNH’s assignment decision after the Round Zero will clearly give way
to the portfolio of fields left for the following rounds and will also give an
indication as to the transition to an open market arena.
Round One will not include all fields, but probably, the most significant
ones in terms of prospective resources. Due to the maturity term, level of
CAPEX and other key factors, deep water fields might encompass Round
As per the Mexican law, the bidding may be organized either as an open
international bidding process (Pemex’s preferred form until now); a closed
invitation to tender (to at least three companies); or, exceptionally through
direct awarding. If public bidding benefits of its own set of rules, the CNH
will have a free hand to set up the bidding context although the contracts’
technical design should be the SENER’s task.
The Round Zero has all the
characteristics of an attractive businessopportunity
moment, since Pemex is
definitely looking forward to build up
consortia, as soon as possible. In this
regard, Pemex’s CEO has been giving
strong signals regarding the Pemex’s
will to behave as a true competitor.
Indeed, despite the preferential rights
of the Round Zero, Pemex will be
considered as competitor and will be
required to duly justify its participation
in any area. In such environment, it
should be expected that Pemex may
change its management and business
policy, even before the 2-years period,
upon which it will be transformed into
a commercially-driven entity.
From a Game’s Theory perspective,
some of the reasonable decisions,
which Pemex could potentially take
in the short/medium term, are the
Because of the public finance
status quo contained in the
Energy Reform, Pemex is most
likely to keep all fields already in
production. However, it may not
dismiss the possibility to resort
to partnerships for some of them
(specifically Salamanca, Salina
Cruz and Tula);
Pemex is most likely to ask for
shallow water and light crude
oil fields without farming-out.
However, Pemex might resort to
farm-out for heavy crude oil in
Pemex will probably migrate some
of the deep water exploitation
Pemex will probably migrate
mature fields exploitation titles
(not yet in production)
Pemex may foster early
partnerships or even PSAs, without
migrating some of its exploitation
Pemex’s goal is quite clear: to upgrade
its role, from being a passive superpowers
entity executing service
contracts, to become a key active
partner in numerous high value
projects. When entering into PSAs,
Pemex might be carried by the IOCs,
aiming to expand the number of fields
in which it can participate, depending
on the size and characteristics of its
portfolio after Round Zero.
Onshore / Offshore
Ava. 2.9 MMMbpce
CINTURÓN PLEGADO DE LA
SIERRA MADRE ORIENTAL
Considered as a medium - low potential area
Ava. 2.5 MMMbpce
Ava. 0.5 MMMbpce
Ava. 20.1 MMMbpce
(Cantarell, Ku- Malob-Zaap, A.J.
Bermúdez, Julio Tecominoacán)
CINTURÓN PLEGADO DE CHIAPAS
Discoveries in the north of this area
PLATAFORMA DE YUCATAN
Ava. 0.5 MMMbpce
Only in production in Guatemala
Ava. 2.6 MMMbpce
12 GULF OF MEXICO
GOLFO DE CALIFORNIA
Dry gas area with a medium - low potential
Considered as a medium - low potential area
SABINAS - BURRO- PICACHOS
Ava. 0.4 MMMbpce
VIZCAINO - LA PURÍSIMA- IRAY
Considered as a medium - low potential area
Another key element of this reform that should not be neglected is the
development of midstream and downstream opportunities to be regulated,
case by case, through a permitting regime. Even if the E&P business remains
the major market, the reform clearly opens the other two levels of the oilrelated
business (midstream and downstream). Refining will be one of the
key areas to be considered by long-term investors.
According to the SENER’s 2011-2025 Natural Gas Market Prospective, a
new strategy has been considered to intensify the use of natural gas. This new
strategy involves the development of transport systems (pipeline networks)
and compression facilities. In addition to these projects, distribution
programs have been considered to develop distribution infrastructure and
gas provisioning capabilities. Midstream activities have not been put aside
and will offer wide possibilities.
Indeed, the secondary legislation will be decisive in this regard, since it
will determine the basis and criterion of downstream activities (storage,
transportation, oil pipelines building, petrochemicals, marketing, etc.).
However, the improvement of the State’s earnings is paramount and their
maximization will rule the partner designation process.
Deepwater projects are still under-exploited in Mexico since Pemex
behaved cautiously and massive areas are yet to be de-risked.
Notwithstanding this prudent behavior, Mexico’s deepwater prospective
resources are high in the Gulf, with an estimated 26.56 MMMBPCE. Some
fields are in this regard particularly relevant: Perdido (100-600 MMboe in
light crude oil); Holok (100-480 MMboe in gas and light crude oil) and
Nox-Hux (90-250 MMboe in heavy crude oil).
According to the U.S. Energy Information Administration, Mexico is the
fourth country with largest reserves of Shale Gas, only after China, the
U.S.A. and Argentina and it is estimated to represent the 6% of the world
reserves of shale gas, and the country plans to profit from this advantage.
Pemex’s serious lack of advanced technology leads the national company
towards the formalization of foreign partnerships. Due to the nature of
Pemex’s needs, it is fair to believe that partnerships are most likely to concern
specialized companies skilled in hydraulic fracturing, horizontal drilling and
other extraction techniques.
If deepwater projects related to shale gas may remain risky, plenty of
onshore opportunities are available. The Burgos Basin is considered as one
of the country’s most promising field in shale gas and is currently arousing
keen interest of private investors.
In any event, due to the low margins on shale gas, the awarding of fields by
CNH might still take some time. Moreover, as Mexico does not have key
comparative advantages vis-à-vis the USA in terms of shale gas, it is likely
that only reservoirs which also include liquids are to be of interest for private
operators. The shale gas market will definitively have a different momentum
and characteristics, as the case of the USA.
The Mexican oil sector will seek and require unprecedented investment
levels, estimated around 60 billion dollars a year. With such investment,
the production may reach over 3 million oil barrels and 16 billion cubic feet
of gas a day, when Pemex’s current cash flow is around 20 to 23 billion
dollars a year.
Reaching such levels entails higher stakes for financial institutions of all
types. Private equity for oil & gas activities will soon be rocketing in the
country. Furthermore, a potential IPO of a Pemex’s highly specialized
subsidiary (i.e. deep waters) is likely to take place in the near future.
For further information about issues discussed in this newsletter, please
David Enríquez Senior Partner – Oil & Gas / Maritime
+52 (55) 5525 0369
Please note that this brochure is provided for informational purposes only
and may not be relied upon as legal advice.
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