Mexico’s Energy Sector Reform
An Edelman Analysis
Senate and Deputies Chamber approved the major constitutional change in years, putting an end to the prohibitions established in 1938 with the oil expropriation laws.
The approved Energy Reform
The Energy Reform was approved by both the Senate (95 in favor and 28 against) and Deputies Chamber (353 in favor and 134 against). The approved document is a combination of the bill presented by President Enrique Peña Nieto and the one developed by Partido Accion Nacional (PAN). The reform modified articles 25, 27 and 28 of the Mexican Constitution, allowing private investments in the energy sector, but stating clearly that Mexican State remains as the solely owner of all natural resources. The constitutional introduced 4 types of contracts for exploration and exploitation of hydrocarbons:
Service provider contracts (payments in cash)
Profit- sharing (payments based on a percentage of the revenues)
Production-sharing (payments based on a percentage of production)
Licenses, in which companies pay royalties and taxes to the Mexican government for the right to explore and drill
A combination of all the four types is also allowed. Additionally, it gives private companies the ability to post expected benefits in their financial statements, as long as they specify in their contracts that all oil and gas they find in the ground belongs to Mexico. However, the constitution would continue to prohibit oil concessions, considered the most liberal kind of access by private oil companies. Energy Ministry will be able to grant permits for oil refinery and process of natural gas, once
extracted. Hydrocarbons could be sold by the entity that possess them, even within Mexican territory. Other important changes introduced by the Bill, are: 1)Pemex and the CFE will transform into state owned productive entities, by which their operations will be sustain by efficiency, honesty, productivity and transparency, based on private sector best practices; 2)the non-inclusion of the Union in
Board, which will now be constituted by the Federal government and independent-expert members; 3)the creation of the Mexican Oil Fund, allowing present and future generations to receive benefits from oil production; 4)the creation of the National Center for Natural Gas control which will promote positive incentives for private investments in pipeline development; and 5)introduction of the National Agency for Industrial Security and Environment Protection as a regulator setting standards for all industry.
MEXICO PUBLIC AFFAIRS UPDATE