Streamlined Investment

Mexico has changed dramatically over the past two years. The long-awaited, politically sensitive structural reforms have occurred (for now, from a legislative viewpoint), and expectation is huge as to when and how they will begin to change the business environment, as well as many aspects of ordinary citizens’ life. Major changes to labor, banking, securities, financial, antitrust, telecommunication, energy, tax, and anti-money laundering legislation have been passed in what is considered to be the most significant legislative transformation in seventy years. Not even the North American Free Trade Agreement (NAFTA), in 1994, generated this much anticipation. Nowhere are these changes more groundbreaking than in the energy sector.

OIL & GAS UPSTREAM

Surface recognition and superficial exploration activities may be carried out by any person with prior authorization from the CNH. Likewise, authorization from the CNH is required for the perforation of exploration, deep-water, ultra deep-water, and model wells. State productive companies will be granted concessions to undertake E&P activities. For this purpose, they may enter into service agreements with private entities.

E&P agreements will be awarded by the CNH, by means of public tender processes in terms of the Hydrocarbons Law, to state productive companies and to Mexican companies that participate individually, or in a consortium or in a special type of Mexican partnership known as asociación en participación (or silent partnership).

Holders of mining concessions will be exempt from having to participate in a public tender process to be awarded an E&P agreement, exclusively with respect to coal-associated gas found in the coal seam subject-matter of their mining concession, provided they prove to have economic solvency and the necessary technical, administrative, and financial capabilities.

While the mining industry maintains its preferential character over any other use of a plot of land, it is now subordinated to oil and gas E&P activities. Should the rights arising from a mining concession be affected by the granting of a hydrocarbons concession or contract, the parties must undertake negotiations in order to develop both projects. In matters of foreign investment, the oil and gas sector as a whole is no longer deemed as being reserved for the Mexican State; the new laws provide that only E&P activities will keep that character, as they will be carried out by the Mexican government, with the participation of private investment (Mexican and foreign) through contracts granted in terms of the Hydrocarbons Law.

TRANSPORTATION, STORAGE, & DISTRIBUTION

The sale, distribution, transportation, and storage of oil and natural gas, including its compression, liquefaction, decompression, and regasification, as well as the management of integrated transportation and storage systems, will require a permit from the Energy Regulatory Commission (CRE). As well, the transportation, storage, distribution, marketing, retail sale of other petroleum products, pipeline transportation, and storage of petrochemicals, will require a permit from the CRE.

In order to achieve a better service, natural gas transportation, and storage systems that are interconnected, may form integrated systems, which will be operated by managers who will coordinate the permit-holders; these managers may be entities formed by the permit-holders that form part of the integrated system. The restriction for foreign investment to operate gas stations and distribute liquefied petroleum gas (LPG) has been eliminated. Permits to operate gas stations and for the retail sale of LPG will be granted as of January 1, 2016.

REFINING & PROCESSING / IMPORT & EXPORT

Oil refining, natural gas processing, and the import and export of hydrocarbons and petroleum products will require a permit from the Ministry of Energy (SENER).

REGULATION PEMEX

PEMEX will become a state productive company, with a special regime in budgetary, administrative, and procurement matters. For the development of its activities, PEMEX may incorporate subsidiaries and affiliates, as well as enter into joint ventures and execute any kind of agreement with individuals or public and private entities, domestic or foreign.

The Board of Directors of PEMEX will approve the terms and conditions in which PEMEX will exercise its rights as holder of equity in other companies, and will issue the guidelines pursuant to which PEMEX will participate in the capital stock of other companies, whether domestic or foreign.

PEMEX’s procurement will be subject to the special regime provided in its own law and in the guidelines issued by its Board of Directors, which as a general rule will be carried out by means of public tender processes, in similar terms as those provided for procurement by the Federal Government.

WHAT’S NEXT?

Upon the enactment of these new laws, the President committed to have enabling regulations enacted by October, including those relating to natural gas and LPG, while the regulations of the National Agency will be enacted over a three month-period, after which we should expect to see the transfer to the National Agency of the matters currently under review by the Secretariat of Environment and Natural Resources to the National Agency.

Round Zero carried out by SENER and CNH in order to grant PEMEX concessions over the areas it has requested for E&P activities concluded on August 13, 2014. As a result, PEMEX was awarded concessions on all 2P oil fields and 67% of the prospective resources it requested, which amounts to 83% of the proven and potential oil reserves, and 21% of the prospective resources of Mexico.

As for the 10 oil fields that were awarded to PEMEX despite a lack the necessary technical capabilities to exploit them, PEMEX must partner with private parties in the so-called Round 0.5. These 10 projects consist of six mature fields (three onshore fields and three offshore fields), one extra-heavy crude field, a gas project and deep-water project.

Likewise, on August 13, 2014, it was announced that the fields would be awarded under public tender process, where any private or public party, including PEMEX, may participate, consist of 156 blocks of contracts, of which 96 refer to exploration projects and 60 refer to production projects. This round (which is known as Round 1.0) is expected in the first quarter of 2015. SENER and CRE may commence the issuance of permits for transportation, storage, distribution, refining and processing activities beginning on January 1, 2015.

ELECTRICITY SECTOR

The Electricity Sector includes the Electricity Industry and the supply of primary raw material for the industry. The Electricity Industry includes generation, wheeling, distribution and sale of electricity, planning, and control of the National Electric Grid (National Grid), and the operation of the Wholesale Electricity Market. The planning and control of the National Grid and the public service of wheeling and distribution remain strategic areas.

GENERATION

Power stations with an installed capacity of 0.5 MW or more, and those represented by a generator in the wholesale electricity market regardless of their installed capacity, require an energy generation permit. Generators may import electricity, or use the electricity generated in their power stations for isolated supply, for example, the import or generation of electricity to satisfy their own energy needs or the export of electricity, in all cases without wheeling such energy through the national grid.

Likewise, in connection with the electricity produced at their own power plants, generators may carry out sales and marketing activities consisting of (i) representing “exempt generators” (see the following paragraph) in the Wholesale Electricity Market; (ii) purchasing electricity, and associated products (related services, power or any other product that ensures sufficient resources to satisfy energy demand, financial transmission rights and clean energy credits, among others); (iii) entering into Power Coverage Agreements to carry out the activities mentioned in item (ii) above; and (iv) acquiring transmission and distribution services, among others. In this case, the strict separation rules mentioned in the Antitrust below will not apply.

Exempt generators (for example, those who do not require an energy generation permit given that the installed capacity of their power plants is not more than 0.5 MW) require a supplier acting on their behalf to sell their energy and associated products in the Wholesale Electricity Market.

WHOLESALE ELECTRICITY MARKET

The wholesale electricity market will be operated by the National Energy Control Center (CENACE). There, generators, vendors, suppliers and “qualified users” will be able to sell and purchase electricity and associated products through Power Coverage Agreements.

These agreements will be the instruments through which market participants agree on purchases and sales of electricity and associated products in the wholesale electricity market. In order to purchase energy in the wholesale electricity market, users must prove to be qualified users. For this purpose, they must comply with certain consumption or demand levels, as determined by the Ministry of Energy (SENER). Offers made in the wholesale electricity market by power plant representatives must be based on the generation costs of each power plant and controllable demand.

REGULATION GOVERNMENT PROCUREMENT

Through public tender processes, SENER may execute agreements or enter into joint ventures with private entities in order to finance, install, give maintenance to, manage, operate, and extend the infrastructure used to provide the public electricity service.

A special regime regarding procurement by the Federal Electricity Commission (CFE) is established. Such regime allows CFE to execute all kinds of agreements and enter into joint ventures with private entities to provide the public services of transmission and distribution of electricity.

CENACE, the agency in charge of the planning and control of the national grid, may enter into joint ventures or agreements with private entities in connection with the above-mentioned activities. Finally, the acquisitions made by the Federal Government in the wholesale electricity market will not be subject to the legal regime generally applicable to government procurement.

WHAT’S NEXT?

Sponsors of projects undergoing development, or already in operation, must elect whether to remain subject to the LPSEE and its regulations, or to be subject to the recently enacted Electric Industry Law. In order to remain subject to the LPSEE, sponsors must notify CRE within a 60 days term following the enactment of the Electric Industry Law; this requirement is not applicable to holders of reserved capacity rights.

CFE will become a state productive company, while CENACE will assume the operational and functional control of the National Grid.