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New laws open opportunities in Mexico

A raft of legislation has liberalised the energy sector. Elisabeth Eljuri, partner and head of Latin America at Norton Rose Fulbright, and Leonie Timmers, trainee solicitor currently based in the firm’s Paris office, give an overview

It is a promising time for the Mexican energy sector. Liberalisation to end the 75-year-old monopolies of Pemex and the Federal Electricity Commission comes against a backdrop of fast-rising power demand and generally favourable business conditions. 

The country’s deep-water and shale plays hold promise, and Pemex doesn’t have the expertise to develop the reserves on its own. In both the mid- and downstream areas, new pipelines and other infrastructure are needed. It all adds up to a big opportunity for investors. 

New laws

The legislation to liberalise the sector, enacted last August, came in a comprehensive package of 21 secondary laws, including the new Hydrocarbons Law, the Hydrocarbon Revenue Law, and reforms to the Foreign Investment Law, the Mining Law, the Law on Public Private Associations, and the Pemex Law. Regulations implementing certain aspects of the secondary legislation were left open for the regulating bodies to draw up and implement, including the drafting of the proposed model contracts to be used by investors in both the oil and gas and power industries and markets. 

The new Hydrocarbons Law confirms that hydrocarbons are the property of the state and that exploration and production (E&P) are strategic operations. 

As such, E&P should be done in one of two ways. First, through entitlements (asignaciones) granted on an “exceptional basis” to State Productive Enterprises (SPEs), including Pemex, giving these SPEs the right to explore and produce hydrocarbons in an area. The other way is through E&P contracts agreed with private companies or SPEs. 

These kinds of contracts will be awarded through a competitive bidding process, organised and regulated by the ministry of energy (Sener), the secretary of finance, and the National Hydrocarbons Commission (CNH). 

The new contract models for E&P activities are: licenses; production-sharing contracts; profit-sharing contracts; and service contracts. Sener chose the production-sharing contract as the preferred model and has published two versions of the contract so far, one for an exploration bid round and another for an extraction bid round. Both of these rounds are scheduled for later this year. The Hydrocarbons Law also allows Pemex to participate in tendering for E&P contracts (after Round Zero) and agree farm-outs with private parties.

Other activities – refining, processing, transportation, storage, distribution and sales – are now unrestricted and can be conducted under a regime that will be generally regulated by Sener and the Energy Regulatory Commission.

The Hydrocarbons Law also establishes that all things being equal – including price, quality, and time of delivery, there will be a preference towards the acquisition of local goods, and the contracting of national services. A 25% target for national content in energy projects is to be achieved by 2025.

The Hydrocarbon Revenue Law regulates the income obtained by the Mexican state from E&P contracts with private companies or from assignments to Pemex to carry out the E&P activities, and the management of the financial provisions of such contracts. 

The amount that holders of entitlements or E&P contracts must pay to the Mexican state will be calculated pursuant to the mechanisms set forth in the relevant contract model, in accordance with the rules contained in the Hydrocarbon Revenue Law. The government’s take varies, depending on the contract. In some cases a signature bonus may be payable, as well as certain royalties, contractual quotas and other compensation.

Regulation

The success of the reforms will depend on the strength and independence of the regulators. The government introduced lots of reforms at the same time as it created several new regulatory institutions. It remains to be seen how well they coordinate and implement the reforms.

How easily Pemex adapts to its new market-driven role will also affect the success of the liberalisation. Pemex’s requests under Round Zero, which did not seem in line with its financial and technological capabilities, showed that the company might struggle to let private investors participate independently. 

Mexico also faces potential problems with local communities who resist land acquisition for energy projects or transmission lines. We have seen examples of this. They can, in the worst cases, halt project development. The government still has some work to do in developing community resettlement and rehabilitation and in spreading information about the reforms. 

All in all, for those who are looking to explore opportunities in Latin America, Mexico is definitely a viable option. It features high on the World Bank’s “Ease of Doing Business” list, where it is ranked 39th (out of 189 economies) up from 43rd in 2013. And whereas with any investment, there are of course risks, with a supportive government and a growing economy the scene seems set for investment opportunities in Mexico.

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