Mexico to restructure energy regulations
Reform offers opportunities and challenges for maritime operators
Mexico is restructuring its entire energy regulatory framework. The first step was taken by the Mexican government on 20 December 2013 with landmark amendments to certain key articles of the Mexican Constitution related to the energy sector, including hydrocarbons and electricity. Those amendments are the legal foundation for broader participation by private entities in several activities that were previously reserved to Mexican nationals or the Mexican state.
Over the years, Mexico has made several attempts to stimulate the development of the Mexican energy sector including the so-called 'Energy Reform' led by former president Felipe Calderon in 2008. The truth is that none of the previous attempts had the desired effect, since any real change required a revision to the fundamental law governing the energy sector in Mexico: the Constitution.
The recent constitutional reforms have led to the enactment of a new set of energy laws and regulations as well as substantive amendments to other laws and regulations to align them with the new energy reform framework. The intention is clear: to allow greater private participation in the entire Mexican energy sector (downstream, midstream and upstream) - whether hydrocarbons or power.
The reform is still in its implementation phase and there are several regulations, administrative guidelines and other regulatory provisions yet to be issued. However, over the last year, the reform has achieved measurable results particularly in the hydrocarbons sector with the publication of tenders for offshore shallow-water exploration and production and production enhancement under the Round One bidding procedure, which were published by the recently strengthened Mexican National Hydrocarbons Commission (CNH). The call for tenders has been well received by many of the relevant players in the domestic and international energy industry. Several well-known companies in the upstream sector are participating in different stages of the tender process.
There are other sectors of activity that have been realigned with the new energy policies introduced by the Mexican government as a result of the constitutional reforms. The maritime sector, which has a very close connection to the oil and gas industry in offshore exploration and production operations, is governed by the Navigation and Maritime Commerce Law enacted in June 2006 (the NMC law).
The NMC law governs the operation of vessels and other naval artifacts (a naval artifact is defined as any fixed or floating structure not designed or built for navigation but that is capable of being moved on the water by itself or by another vessel, or built on the water) in Mexican waters as well as the most important agreements related to such activities including charter parties and purchase and sale agreements, among others.
It is important to note that regulations for the NMC law were published in the Federal Official Gazette on 4 March 2015 and became effective on 4 April 2015.
Prior to the enactment of the NMC law, two previous versions of navigation laws coexisted and remained in force: a Navigation Law enacted in 1994 as well as another Navigation Law and Maritime Commerce Law enacted in 1963. Both were repealed by the new NMC law except for certain regulations under the Navigation Law of 1994 which remained in effect. Those regulations have now been furnished by the new regulation published on 4 March 2015, which will now offer a new approach for business opportunities for the private sector.
Prior to the new regulations of the NMC law, the legal standing of foreign vessels in Mexican waters operated by foreign navigation companies was not entirely clear and according to some interpretations, only Mexican navigation companies could operate foreign-flagged vessels in Mexico by securing a temporary navigation permit limited to up to two years. These permits are granted for a period of three months and can be renewed up to seven times. If the vessel stays more than two years in Mexican waters, it has to be flagged as Mexican, but certain exceptions may apply for highly specialised vessels, including those dedicated to oil and gas activities.
It was, however, possible for foreign navigation companies to operate foreign-flagged naval artifacts, such as drilling rigs and production platforms under temporary authorisations. This confusing legal structure led foreigners to implement complex corporate and tax structures involving incorporation of Mexican navigation companies to hold permits to operate foreign-flagged vessels and still comply with the restrictions on foreign investment provided by the law.
The new regulations to the NMC law provide a much clearer process to allow foreign entities to secure permits to operate foreign-flagged vessels and naval artifacts, such as rigs and production platforms. Although foreign navigation companies will continue to have some restrictions, these will not represent an important threat to their business needs. Moreover, the new regulations provide specific treatment for vessels and naval artifacts dedicated to oil and gas activities, including its regulation of navigation and permanency in Mexican waters, safety and inspection, crew training, and prevention of pollution caused by hydrocarbons, among other matters which are really important to consider to prepare an efficient business plan.
Another important activity that is expected to be further developed in Mexico is ship building. This is also reflected in the new regulations to the NMC law which add specific provisions and standards for such activities including the grant of authorisations for shipyards to operate in Mexico.
The effort of the Mexican government to harmonise all the sectors involved or related with the new energy industry has been remarkable, and the maritime sector constitutes clear evidence of this.
In addition to the enactment of the regulations to the NMC law, the federal government aims to foster and promote such sector. Last year, it announced a plan to update the applicable regulatory framework to increase the legal certainty in connection with the merchant marine; extend and modernise port infrastructure; and modernise the maritime fleet, focused on highly specialised equipment for the oil and gas sector. The plan also includes substantial investment.
Companies interested in participating in maritime business opportunities in Mexico will need to fully understand and be well advised of the Mexican maritime regulatory framework including its recent developments in order to carry out an effective business plan and implement the most efficient corporate and tax structures.
*Benjamin Torres- Barron is head of Mexico's Energy, Mining and Infrastructure practice group. Hector Medina is an associate also with Mexico's Energy, Mining and infrastructure practice group of Baker & McKenzie