Thought leadership from our experts

Recent developments in the Mexican oil and gas sector

Nicolás Borda Barrero, Haynes and Boone, Mexico Rodrigo Vazquez del Mercado, Greenberg Traurig, Mexico

Background

The energy sector in Mexico has been completely overhauled since the Constitutional energy reform of December 2013, subsequently with the new implementing legislation enacted in mid-2014, the new regulations issued in October and November 2014 and the implementing guidelines and administrative provisions currently at COFEMER, in drafting process have been recently published in Mexico's Official Gazette.

The energy reform of 2013 fully opened the oil & gas upstream, midstream and downstream sectors in Mexico and provided significant changes to the electricity sector.

Mexico has gone through many small changes in the oil & gas sector within the past 12 years. It has evolved from a closed industry only for State activities, the multiple service contracts (2003), the unsuccessful opening of coalbed methane gas (2006), the integrated service contracts (pursuant to the energy reform of 2008, and implemented in 2011), to the new contractual scheme which opens E&P activities.

Mexico began the liberalization of the energy sector in 1992 when President Salinas de Gortari amended the Electricity Law to provide for six new activities not considered as public service and therefore to be carried out by the private sector (import, export, cogeneration, self-supply, independent power producers and small production).

Nobody questions the rationale of the 2013-2014 energy reform because it was quite clear that Mexico was importing substantial amounts of refined products, petrochemicals and gasoline and would become an importer of crude oil in a few years. In 2013 Mexico imported, 45% of the gasoline, 75% of the petrochemicals, and almost 30% of the 8 bcfd of natural gas consumed in Mexico.

New Activities in the Energy Sector

The Secondary Legislation is comprised of 21 laws, which created 9 new laws and amend 12 existing laws.

This integral Energy Reform fully opens the Mexican oil and gas industry to 100 percent foreign investment in:

  • Upstream Activities: Before, it was only possible to execute performance-based service contracts; however, the Secondary Legislation will also allow production sharing contracts (PSC), profit sharing agreements (PSA) and license agreements. This will attract all kinds of operators in deepwater, shale, shallow waters, mature fields, etc.;
  • Midstream Activities: In addition to transportation of natural gas, companies now may through permits transport and store petrochemicals and refined products; and
  • Downstream Activities: Private companies may carry out refining and commercialization of fuels, as well as LPG distribution activities. As of January 1, 2016, the Energy Regulatory Commission (CRE) may grant permits for retail sales of gasoline and diesel to the public.

In connection with the electricity industry, the major structural changes are the following:

  • Liberalization of power supply and generation to allow private investment.
  • Creation of a new power market for qualified users.
  • Autonomy of the independent system operator (ISO) by the CENACE.
  • The national grid may be expanded, operated and/or maintained by private companies through agreements executed with the State.
  • New Geothermal Energy Law and opportunities of investment in this area.

New Agencies of the Federal Government

  • Creates the National Industrial Safety and Environmental Protection Agency in the Hydrocarbons Sector (ANSIPA). The ANSIPA will begin operations next month and will be in charge of HSE matters in the oil & gas sectors including upstream, midstream and downstream activities.
  • Creates the National Control Centre of Natural Gas (CENAGAS) to act as an independent manager and administrator of the national integrated transport and storage system for natural gas. The natural gas pipelines owned by PGPB are being transferred to CENAGAS who now will be in charge of all the open access bidding process for new natural gas projects.
  • Transforms the National Center for Energy Control (CENACE) from a CFE division into an independent agency who shall act as the independent grid operator.
  • Creates the Mexican Petroleum Fund for Stabilization and Development (FMP). The FMP will receive and manage the funds from the new upstream contracts and federal leases (asignaciones petroleras). The FMP will contribute to the Federal Budget up to 4.7% of the GDP. Up to 3% of the GDP to long term savings and the surplus will be divided as follows: 40% to long term savings and 60% as follows: (i) universal pension system (up to 10%), (ii) technology and science projects and alternative energies (up to 10%), (iii) oil & gas investments and infrastructure development (up to 30%) and (iv) scholarships and regional development (up to 10%).
  • Allows more autonomy to be granted to CFE and PEMEX. PEMEX and CFE have been transformed into productive state entities which now are conducting business with a much more agile and business oriented focus. The Union is no longer part of the Pemex Board of Directors. Pemex and CFE will create new affiliates: (i) CFE (CFE international and CFE gas) and (ii) Pemex (logistics, drilling, etc.). Pemex will be restructured in March 2015 in two major divisions: (i) E&P and (ii) Industrial Transformation (downstream).
  • Strengthens regulatory agencies (CRE and CNH). These upstream and midstream regulatory agencies are now at the same level of the Ministry of Energy and their legal nature is of a constitutionally coordinated agency. Nevertheless, they still have to coordinate with the policy maker (the Ministry of Energy). However, they have more autonomy in terms of budget and decision making.

Conclusions

The current lower oil price will delay unconventional resources such as shale gas and tight oil but to a lesser degree deep water projects since first oil takes a long time. Also, the Federal Government is cutting down on capex for new infrastructure projects and Pemex has advised it will start cutting some jobs.

Despite this, the major constitutional reforms passed in 2013, particularly the Energy Reform will be key in helping Mexico overcome the current economic climate.

In February or March 2015 it is expected that a new anticorruption system will be implemented. This along with improvements in the rule of law should help Mexico attract the much needed capital and provide certainty to foreign investors. Despite protection under NAFTA and bilateral investment treaties, similar efforts include mandatory bar association for lawyers in Mexico and other related reforms to the administration of justice.

It will take time for all the new participants in the Mexican energy market to understand and test all the new interactions between the newly created agencies and the first mover advantages created pursuant to this unique integral energy reform.

Round 1 for exploration in shallow waters comprised of 14 offshore blocks is currently under bidding process with more than 30 companies registered to access the data room. Moreover, the migration process from performance service contracts to the new E&P contracts and the farm-outs of the federal leases obtained by Pemex pusrsuant to Round Zero are currently under process.

2015 will be an exciting year for the Mexican energy sector.