By Bruno Viñals and Guillermo Cuadra, Cuesta Campos Y Asociados, S.C.
The President of Mexico, Mr. Enrique Peña Nieto on August 12, 2013, proposed a reform to the energy regulations, "The Energy Reform", which was approved and published, after the due legislative process, in the Federal Official Gazette on December 21, 2013.
The main purposes of the reform are, (i) to increase the investment and employment opportunities in the Energy industry; (ii) to strengthen PEMEX and the Federal Electricity Commission (CFE); and (iii) to strengthen the authority of the Mexican State as the owner of the Mexican petroleum and gas, and as the regulatory entity of the petroleum industry in Mexico.
1. Scope of the Energy Reform
The Energy Sector comprises, among others, petroleum and hydrocarbons, electric energy and geothermal energy. As part of The Energy Reform, certain provisions of the Mexican Constitution have been amended as well as several derived laws and its regulations, which are listed below:
- Mexican Petroleum Act.
- Hydrocarbons Act.
- Federal Electricity Commission Act.
- Coordinated Regulatory Entities in the Energy Sector Act.
- National Agency for Industrial Security for the Protection of the Environment in the Hydrocarbon Sector Act.
- Electricity Industry Act.
- Geothermal Energy Act.
- Mining Act.
- Foreign Investment Act.
- National Waters Act.
- Acquisitions, Leases and Services of the Public Sector Act.
- Public Work and related Services Act.
- Federal Public Entities Act.
- Institutional Law of Federal Public Organization.
- Public and Private Associations Act.
2. Constitutional Reform
In accordance with the Constitutional Reform, the Mexican Congress approved amendments made to Articles 25, 27 and 28, which broadly establish the following:
- The Federal Government will be in charge of the following strategic resources and areas:
o Mail and courier, telegraphy, radiotelegraphy;
o Radioactive minerals and generation of nuclear energy;
o Planning and control upon the national electric system, as well as the public service for transmission and distribution of electric energy and the exploration and extraction of petroleum and other hydrocarbons.
o In regard of the Electricity Sector (planning and control of the national electricity system and the public service of transmission and distribution of electric energy), the use by private individuals would be done through concessions granted by the Federal Department of State.
o Regarding the Hydrocarbon Sector, (the exploration and extraction of petroleum and hydrocarbons). There are not permitted any kind of concessions. Moreover, the petroleum and hydrocarbons that are found in the Mexican soil are property of the Mexican nation, and extraction activities shall be granted only through assignments made by government owned companies, as PEMEX or any of its subsidiaries and to individuals by Agreements as a result of winning a public bid.
3. Regulatory Entities
The Federal Department of State, throughout the Ministry of Energy, shall supervise the operation of the following federal regulatory entities of the energy sector:
- Hydrocarbon National Commission (CNH)
- Regulatory Commission for the Energy Sector (CRE)
Nevertheless, these federal regulatory entities are vested with technical and administrative autonomy, as they are endowed with general capacity.
4. Productivity-Based Companies of the State
As decentralized entities of the State, they shall have the following characteristics for their administration:
- They are exclusively owned by the Federal Government;
- Any entity of this nature has general capacity and its own resources;
- Vested with technical and administrative autonomy for its administration.
- All of the profits belong to the Mexican State, and shall be used for the reinvestment in those State companies.
Not exceeding a period of 2 years from the publication of The Energy Reform, the federal entities Mexican Petroleum (PEMEX) and the Federal Electricity Commission (CFE) shall become productivity-based companies of the State.
PEMEX as a productivity-based company of the State shall be subject to the Mexican Petroleum Act, its regulations and any other provisions derived thereof. Commercial and Civil Law shall supplementary apply.
The Federal Electricity Commission (CFE) as a productivity-based company of the State shall be subject to the Federal Electricity Commission Act, the Regulations to the Federal Electricity Commission Act, the Electricity Industry Act and provisions derived thereof. Commercial and Civil Law should supplementary apply to this sector.
The Ministry of Energy (SENER) through the CNH is the federal authority to award PEMEX the assignments granted in Article 27 of the Mexican Constitution, known as "Round Zero", which consists in the allocation of specific fields for exploration and exploitation. It also grants the execution of agreements to individuals that requested an assignment through public bid.
Any migration in the assignments to be converted to agreements when PEMEX decides to execute an agreement with any company should be done through a public bid and never through a direct award.
The hydrocarbon sector agreements will be public, including all the steps in the public bid proceeding.
Pursuant to the Constitutional Reform, national content should be limited to those International Treaties that Mexico has signed.
In the hydrocarbon sector, the Mexican Fund for Stabilization and Development has been created, which shall be in charge of collecting any income (others than taxes) derived from any agreement or assignments that have been destined as part of an investment, research and/or development, among others.
6. Secondary Legislation - Hydrocarbons Act
The purposes of the Hydrocarbons Act are the following:
- The acknowledgment, superficial exploration and extraction of hydrocarbon materials;
- Any treatment, refinement, sell, commercialization, transport and storage of petroleum;
- Any process, liquefaction procedure, de-compression and re-gasification, as well as transport, storage, commercial distribution and natural gas distribution;
- Transport, storage, commercial distribution and petroleum distribution and,
- Transport through ducts and storage linked to petrochemical ducts.
The amendments referred to the Hydrocarbons act are the following:
- Foreign Investment up to a 100% permitted for the petroleum and gas industries.
- Any permits regarding petrochemicals and petroleum products shall be granted with respect to the following:
o Any individuals that are involved in transport and distribution activities would not be allowed to participate in commercial procedures
- Likewise, exploration and exploitation procedures are available pursuant to the new public offering agreements for private sector companies, both during the assignments made in Round Zero as well as in Round One.
- Every public offering Round to assign new services, utility, shared production and license agreements to produce natural gas should be public.
Thus, the Federal Department of State has stated that the creation and the established procedure of Round Zero and Round One are the most important actions regarding the Energy Reform, which are explained as follows:
7. Round Zero
Through the utilization of this round, any assignments related to PEMEX shall be public, such as those related to production facilities that PEMEX would preserve for exploration and exploitation.
Any migration or changes to the assignments for its conversion to agreements executed between PEMEX and individuals in order to exploit its assignments for not having the sufficient quality or capacity shall be made through a public offering and never through any direct acquisition.
8. Round One
Pursuant to Round One, the new public offering agreements for exploration and extraction shall be made for private companies.
The agreements regarding exploration and extraction shall be executed through a public offering.
The agreements granted through a public offering in the Hydrocarbon Sector shall be public, including any and all offering steps and its guidelines.
Both rounds should be developed trough 2 phases that comprise the granting of 11 new agreements in each of them.
9. Electric Industry Act
The provision of electrical services is a matter of public interest; therefore, the generation and commercialization of electric energy are services that should be provided under a free competition rule, and such permits should be granted by the CRE.
As relevant areas for the State, the transmission and distribution of electricity shall be developed by the State, without any prejudice regarding the execution of agreements with other private companies for better development of those areas.
CFE shall be able to execute any type of agreements, contracts, alliances, assignments or any other act made between the CFE and individuals or companies (either public or private) in order to fulfill with its corporate purpose.
Likewise the National Program of Infrastructure has been created, which foresee the construction of new ducts for natural gas transport, in order to substitute diesel and combustion oil used to generate electric energy.
It is also important to consider the treatment procedures and characteristics of Electrical Centrals, which are the following:
- The Electrical Centrals with a capacity lower than 0.5 MW and any other central of any other size with an included generator will require a special permit granted by the Regulatory Commission of Energy in order to generate electricity.
- The owners of the Centrals that do not require and do not obtain such permit shall be called Exempted Generators and may only sell their electricity and associated products through a Supplier.
The commercialization of electric energy is conformed by the rendering of services to the final users, representing exempted generators in the Wholesale Electric Market, to make transactions thereof and to execute operation agreements; to acquire the services for transmission and distribution based on Regulated Fees.
In case of supply the electricity to the final users, pursuant to the above mentioned, it is necessary to obtain a permit from the CRE as a Supplier.
10. Geothermal Energy Act
The Ministry of Energy would grant any concessions to individuals for the exploitation of geothermal materials and would conduct the corresponding procedures in regard of the request of permits by any interested party for the exploration and research activities.
The activities related to this Act are of public interest and should be preferred against any other use or benefit of the sub-soil of the lands; therefore, the occupation or superficial affection of the lands, either in a total or a partial manner; the simple limitation of ownership rights or any expropriation should proceed, as long as a prior public utility notice has been made regarding such pieces of land, pursuant to the Law pertaining to such matter.
The Energy Law Reform will significantly increase the economic and financial activity of the Mexican energy sector, as well as the activity of several related markets. Thus, will result in the better utilization of the energy resources and better pricing practices for consumers, due to the opening to foreign investment in this industry, which should lead to more competitive results in the near future.