The Energy Reform Decree and Transitory Regime The Energy Industry

The Energy Industry
December 16, 2013
Executive Summary
The Energy Reform
Decree and Transitory Regime
Final document approved by the Mexican Congress
Hydrocarbons in the subsoil will continue to be the property of the Nation.
The exploration and extraction of hydrocarbons, the planning and control of the electricity
system and the transmission and distribution of electricity will be handled by the State.
Pemex and the CFE will become “State Production Entities”.
Private parties may take part in:
- Exploration and extraction of hydrocarbons, under four different types of contract:
- Refining, gas processing, transportation, storage and distribution under permit:
- Generation of electricity under permit; and
- Transmission and distribution of electric energy, under contract.
Summary
Congress has approved the “Decree amending and
adding provisions to the Mexican Constitution in
matters of energy”.
The debates emphasized the need to modernize the
energy sector and strengthen the Department of
Energy (Sener) and regulatory bodies, i.e., the
National Hydrocarbons Commission (NHC) and the
Energy Regulatory Commission (ERC) as well as
future “State Production Entities”: Petróleos
Mexicanos (Pemex) and Comisión Federal de
Electricidad (CFE).
It also provides the means for private parties to
participate in the sector.
In a term of 120 days as from the date on which the
decree goes into effect, the respective secondary laws
should be issued based on the provisions of the
transitory regime specified in the decree.
Following are the principal amendments and
additions:
Article 25:
The Federal Government will continue to own and
control State organisms and the State Production
Entities.
The planning and control of the National Electric
System; the public transmission and distribution of
electricity and the exploration and extraction of oil
and other hydrocarbons will remain in the hands of
the State in the terms of article 27 of the
Constitution.
Social and private sector companies will be
supported by criteria of social equity, productivity
and sustainability.
Article 27:
No concessions will be granted for radioactive
minerals, oil or solid, liquid or gas hydrocarbons.
According to the regulations, the State will conduct
all exploration and extraction of hydrocarbons by
means of assignments to State entities or contracts
with private parties.
The planning and control of the national electric
system and the public transmission and distribution
system will be in the hands of the State.
No concessions will be issued for the abovementioned activities. Private parties may take part
in all other operations via contracts.
State Production Entities may enter into contracts
with private parties.
Types of contract and the respective payments
During that same period, Congress will make the
changes to the legal framework necessary to regulate
the following, among others: the different models of
contract and types of compensation, as follows
Contract models: Among other requirements
Service contracts, shared-profit contracts, shared
production contracts, or licensing contracts. The
contract model will be determined in each case.
Types of compensation: Among others. In cash
for service contracts, (ii) in the form of a
percentage of the profit for the respective sharedprofit contracts, (iii) in the form of a percentage
of production for shared-production contracts,
iv) cash in the case of licensing contracts, or (v)
any combination of the foregoing.
Booking expected benefits
Article 28:
The planning and control of the national electric
system, the public electricity transmission and
distribution service and the exploration and
extraction of oil and hydrocarbons have been
identified as strategic areas.
The petrochemical industry is no longer considered
a strategic area.
The Mexican Oil Fund, a public trust, is created in
order to receive, manage and distribute income
arising from assignments and contracts.
Transitory provisions
The bases to be considered in secondary legislation
are established in 21 articles. The salient points are:
Definition of State Production Entities and the
regulation of same
Pemex and the CFE will become “State
Production Entities” within a period of two
years. During that period, Pemex may receive
assignments and sign contracts.
Regulation of those entities will be drawn up in 120
days, including a special regime for contracting,
acquisitions, leases, services, public works, public
debt and other factors required to make them
competitive.
Private parties or State Production Entities may
report benefits expected from each assignment or
contract.
Round zero: Preferential bidding
processesWith the assistance of the NHC, the
Sener will conduct preferential reviews of Pemex
requests for exploration areas and production fields.
Assignments will specify service area, depth and the
term of each.
Transparency and external audits
Within a term of 120 days, the bases and rules for the
procedures involved in State contracts with State
Production Entities or with private parties will be
established, which must be made known and made
available to the public for consultation.
Likewise, contracts will be required to contain
clauses pertaining to transparency, external auditing
systems and the disclosure of prices, taxes and
payments.
Migration of Pemex assignments
Pemex may reclassify assignments as contracts with
the approval of the SENER and the assistance of the
NHC. If Pemex decides to contract a private party,
the NHC will conduct the bidding process. No
assignments may be transferred without SENER
approval.
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National content
The participation of domestic and local production
chains will be encouraged; the minimum
percentages of national content will be established
in the law, and the national industry will be
promoted in those areas.
Preference for the use of surface area
of the subsoil
Hydrocarbon exploration and extraction and the
public electric energy transmission and distribution
system will have preference over any other system
involving the use of the soil or the subsoil.
Mining concessions
Mining concessions will not include the right to oil
and hydrocarbon exploration and extraction.
Whenever technically feasible, the law will provide
mechanisms to facilitate the coexistence of these
activities (mining and the activities associated with
hydrocarbons).
New order of competencies
In a period of 120 days, the laws will grant
competencies to:
The Sener, for it to design contracts and the
technical guidelines for bidding processes.
The NHC – for it to authorize surface
reconnaissance and exploration services; issue
invitations to bid, award and sign exploration
and extraction contracts and supervise
extraction plans.
The ERC – for it to regulate and issue permits
for the storage, pipeline transportation and
distribution of oil and gas, among others. Also,
for it to regulate third-party access to pipelines
and storage areas, regulate and issue permits for
electricity generation and authorize rates for the
transmission and distribution of electricity.
The Department of Finance – for it to establish
financial and tax conditions for all contracts.
Mexican Oil Fund for Stabilization
and Development
The Mexican Oil Fund, with the Banco de Mexico
acting as trustee, will become a public trust in 2014
and begin operating in 2015.
The fund will receive all State revenues arising from
assignments and contracts, with the exception of
taxes, and will make all payments and transfers
contemplated in the law.
National Center for Natural Gas Control
Once the Law Regulating Article 27 of the Mexican
Constitution in Matters Pertaining to Oil has gone
into effect, the national Center for The Control of
Natural Gas will be created in a period of 12 months,
which will operate the national pipeline
transportation and storage system.
National Center for Energy Control
Likewise, the National Center for Energy Control
will be created to control the operations of the
national electricity system, the electricity wholesale
market and open and nondiscriminatory access,
among others.
Encouragement of clean energy
In a term of 365 days, the legal framework required
to promote environmental protection during the
course of those processes will be drawn up. The
parties involved in the electricity industry will be
committed to the use of clean energy and the
reduction of pollutants.
The National Industrial Security and
Environmental Protection Agency
This agency will be created, which will regulate and
supervise the facilities and operations of the
hydrocarbons sector, the dismantling and
abandonment of facilities and comprehensive
control of residues.
Sanctions
The laws must warn, identify and severely punish all
signatories, contractors, permit holders, civil
servants and other public and private individuals
and entities, whether Mexican or foreign, engaging
in acts or omissions for the purpose of influencing
decision-makers at the State Production Entities in
order to secure a personal economic benefit.
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Contacts
Guillermo Pineda
Lead Partner for the Energy Sector
guillermo [email protected]
(55) 5263 6082
Irene Hernández
Lead Partner for CP&I and Energy Tax and
Legal Services
[email protected]
(55) 5263 8647
Francisco Ibáñez
Lead Partner for the CP&I Sector
[email protected]
(55) 5263 6085
Mario Alberto Rocha
Senior Manager for Legal Services
[email protected]
(55) 5263 8602
Jorge Pedroza
Manager - Energy Sector
[email protected]
(55) 5263 8679
Javier Zenteno Barrios
Founding Partner - Zenteno-Lira Mora
Abogados y Asociados
[email protected]
(55) 5281 7188
Humberto Lira Mora
Founding Partner - Zenteno-Lira Mora
Abogados y Asociados
[email protected]
(55) 5281 7127
Horacio Montoya Key
Partner - Zenteno-Lira Mora Abogados
y Asociados
[email protected]
(55) 5281 7128
Andrés Martín Escobar
Associate - Zenteno-Lira Mora Abogados
y Asociados
[email protected]
(55) 5280 7852
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