i Oil and gas
Before the 2013 amendments to Mexico's Federal Constitution, the Mexican energy industry was completely closed to private investment, all activities related to oil were reserved to the government and were carried out and performed only by the government-owned oil and gas company Petróleos Mexicanos (Pemex) and its subsidiaries. Private companies' participation in the hydrocarbons industry was limited to service agreements with Pemex.
On 20 December 2013, Articles 25, 27, and 28 of the Federal Constitution were amended2 and 21 transitional articles were approved by the Mexican Congress, allowing Mexico to award allocations to government-owned production companies, or exploration and extraction agreements to private natural or legal persons.
On 12 August 2014, 21 secondary laws were issued and published in the Official Federal Gazette, and 22 regulations were published on 31 October 2014. As a result of those amendments, an entirely new environment in the energy industry arose.
The new energy legal framework allows the participation of private companies in hydrocarbon projects, subject to their having obtained the required permits from the new government regulatory bodies.
Although private companies may engage in any activity related to the hydrocarbon industry, Pemex through its new government-owned subsidiaries will continue to participate in all upstream, downstream and midstream activities. These subsidiaries are (1) Pemex Exploration and Production; (2) Pemex Drilling and Services; (3) Pemex Cogeneration and Services; (4) Pemex Ethylene; (5) Pemex Fertilizers; (6) Pemex Logistics; and (7) Pemex Industrial Transformation.
The opening up of the exploration and extraction business area is evidenced in the upstream sector, where new private companies have been participating in:
- a the seven calls to tender that have been issued by the National Hydrocarbons Commission (CNH); and
- b the two farm-out procedures also called by CNH.
Currently, 38 exploration and extraction agreements have been awarded to private companies for onshore and offshore oil and gas fields and although their commercial exploitation will not commence immediately, these new contracts represent important investment in Mexico for the coming years. Furthermore, one farm-out contract for exploration and extraction activities in ultra-deep waters has been awarded to a major international company that will partner with Pemex. Also, another project was recently announced by Pemex and CNH for exploration and extraction activities in shallow waters. More blocks are expected to be farmed out by Pemex throughout 2017; the development of those areas, in cooperation with Pemex, will be opened up to private companies through participation in a tender process overseen by CNH.
The Mexican legal framework governing the electricity market has changed from being restricted to unrestricted, with the market now fully open to private investment, in generation and trading, with the possibility of joint ventures or public-private partnerships between the Mexican government (through the government-owned production company Federal Electricity Commission (CFE)) and private companies.
The first government auction for long-term supply and purchase contracts was initiated last year by the new regulatory body, the National Energy Control Centre (CENACE). The auction's main purpose was to purchase and sell power, cumulative electric power and clean-energy certificates. The auction, which was concluded in 2016, resulted in 11 agreements to purchase electricity from private companies. Additionally, the second electric auction called by CENACE, which was also concluded in 2016, resulted in numerous agreements to develop solar and wind electric projects throughout the Mexican territory. Currently, CENACE is preparing the auction guidelines to call for a third tender procedure.
i The regulators
Different governmental regulatory bodies have responsibility for upstream, downstream and midstream activities in the hydrocarbon industry, and other government bodies have responsibility for electricity industry activities. These regulatory bodies are as follows.
Ministry of Energy (SENER)
SENER is in charge of Mexican energy policy and issues directives on, among other things, oil and gas matters.
SENER selects contractual areas for oil and gas activities that will be put out to tender by CNH, and determines the model contract to be used in each tender and for each contractual area. It also issues permits for treating and refining oil, processing natural gas and exporting and importing hydrocarbon and oil products.
SENER is in charge of issuing the policies and guidelines that establish the electricity market and the conduct of the electricity industry in general, such as the Wholesale Electricity Market Guidelines (the Guidelines) (see Section IV.ii, infra).
The following are among the main responsibilities of CNH:
- a to regulate and supervise exploration and extraction of hydrocarbons;
- b to organise bidding procedures for the award of hydrocarbon exploration and extraction contracts;
- c to execute hydrocarbon contracts with awarding companies;
- d to manage and supervise allocations and exploration and extraction contracts; and
- e to provide technical advice to SENER.
- f to organise bidding procedures for those blocks farmed out by Pemex.
CNH has issued seven calls to tender for the award of exploration and extraction contracts in shallow and deep waters, and for some onshore blocks. Bidding guidelines and model contracts for each type of tender are prepared by SENER with technical assistance from CNH. Additionally, CNH has called two tender procedures for some blocks farmed out by Pemex, which were awarded in round zero.
Energy Regulatory Commission (CRE)
At present, and because of the amendments made to the Federal Constitution, CRE has taken on an important role in matters related to electricity, natural gas, hydrocarbons, oil products and petrochemicals.
CRE issues regulations and permits regarding the transportation and storage of hydrocarbons and oil products; transportation by pipelines and storage of petrochemicals; distribution of natural gas and oil products; regasification, liquefaction, compression and decompression of natural gas; trade and public sale of natural gas and oil products, and distribution of petrol and fuels for aircraft.
None of the activities referred to above may be carried out without prior authorisation and a permit from CRE.
In addition, CRE is in charge of issuing all permits related to electricity generation, and the qualified supply and small-scale distribution of electric power, among other things. Furthermore, it issues administrative regulations and methodologies to determine fees in connection with those activities.
Industrial Safety and Environmental Protection Agency (ASEA)
The main purpose of this regulatory entity, which is controlled by the Ministry of Environment and Natural Resources, is safeguarding people, the environment and industrial hydrocarbon facilities, including the safe decommissioning and disposal of facilities.
ASAE's areas of control and supervision include activities related to oil and gas, natural gas, oil products and petrochemicals.
Mexican Petroleum Fund
The Mexican Petroleum Fund is in charge of obtaining, managing, investing and supplying revenues from allocations, as well as hydrocarbon exploration and extraction contracts, net of taxes.
The fund is a government trust created by the Ministry of Finance and Public Credit, as trustor, and Mexico's central bank, the Bank of Mexico, as trustee, and is managed by three government representatives and four independent members.
One of the main purposes of the fund is to pay the compensation obtained from exploration and extraction activities to private companies and investors, according to the model contract and the terms and conditions set therein.
CENACE is an impartial body responsible for the planning and operational control of the National Electricity System, as well as operating the wholesale electricity market and ensuring open access to the national transmission network and general distribution network.
Natural Gas National Centre (CENAGAS)
CENAGAS is an impartial body responsible for the management of the National Natural Gas Storage and Transportation System. Its purpose is to guarantee the efficient supply of natural gas throughout the country.
ii Regulated activities
Exploration and extraction activities will be carried out by means of contracts awarded by CNH through bidding procedures in which determined oil and gas fields are tendered. If a company is awarded a contract for a determined field, it enters into the specific type of contract to be used for that field (e.g., licence, production-sharing contract, income sharing, and services).3
Oil and gas downstream and midstream activities will be carried out through permits issued by SENER and CRE, as follows:
- a SENER: for hydrocarbons, petrol and fuel import and export activities; treatment and refining of oil; and, process of natural gas; and
- b CRE: transportation, storage, distribution, commercialisation and public dispensing of petrol.
Permits required for electricity industry activities are issued by CRE and CENACE, as follows:
- a CRE: permits related to the generation, independent production, small-scale production, and the supply of electricity; and
- b CENACE: permit to connect to the national distribution and transmission network.
Furthermore, for the development of new facilities, there may be additional requirements or federal, local or municipal permits needed, depending on the location, among them: (1) a construction permit; (2) a land-use licence; (3) an environmental impact assessment; (4) social impact studies; (5) a civil protection programme; (6) an air emissions environmental licence; and (7) an operational licence.
To develop energy projects, surface rights must be secured and, therefore, agreements with landowners must be executed. If a project is to be developed on agrarian or ejido land, certain requirements must be met in accordance with specific agrarian legislation and regulations.
iii Ownership and market access restrictions
Underground hydrocarbons are considered to be the sole property of the Mexican state and therefore, no private company may own them. Once hydrocarbons are extracted from the underground, they may be transferred to an exploration or extraction contractor depending on the contractual scheme applicable for the specific area from which the hydrocarbons where extracted (e.g., under licence contracts).
If an exploration or extraction of hydrocarbons contract is awarded to a foreign entity, one of the conditions of the agreement is Mexican residency for tax purposes, for which typically a Mexican entity is incorporated according to Mexican law and prior to formalisation of the exploration or extraction contract.
The requirement to get oil-related interests is by means of being awarded and exploration or extraction contract.
iv Transfers of control and assignments
Following CNH public tender procedures for the award of agreements for the exploration and extraction of hydrocarbons in shallow water, model agreements concluded in relation to upstream activities give the possibility of conducting the sale, assignment, transmission or any disposition of all or any part of the rights and obligations that derive from the agreements. Prior written authorisation is required from CNH, which will take into consideration the prequalification criteria that was considered for the original contractor.
Also, through entering into exploration or extraction agreements, the contractor is bound not to undergo, directly or indirectly, a change of control during the term of the agreements, without prior consent from CNH. The contractor also agrees to inform CNH of any changes in its capital structure, unless it is listed on the Mexican Stock Exchange.
With regard to other activities in the production chain (midstream and downstream), the new legal framework allows for the assignment of permissions granted by both SENER and CRE, provided that the licensees have obtained the prior corresponding approvals in such instances, and for which the following conditions must be met:
- a the permit shall be in full force and effect;
- b the transferor has fulfilled all its obligations; and
- c the transferee meets all the requirements to be a permit holder and agrees to comply with the obligations under the permit that is the subject of the assignment.
III TRANSMISSION/TRANSPORTATION AND DISTRIBUTION SERVICES
i Vertical integration and unbundling
Before the Energy Reform, Pemex, through its subsidiary body Pemex Gas and Basic Petrochemicals, owned the infrastructure that formed the integrated national natural gas storage and distribution system. Following the energy reform the newly created body CENAGAS owns and controls the system and as an independent administrator and manager is responsible for developing all related activities for the storage and distribution of natural gas.
SENER with the support of CENAGAS has issued a five-year plan to expand the national natural gas storage and transportation system. The plan includes more than 5,150 kilometres of gas pipeline and aims to:
- a expand the system by 85 per cent by 2018;
- b develop strategic social and commercial pipelines; and
- c increase import capacity from 5 to 9Bcf.
According to the applicable legal provisions, participants in the natural gas industry may hold different permits for activities related to the transportation, distribution, storage, and commercialisation of natural gas if they meet the necessary requirements issued by CRE.
According to the Electric Industry Law (the Electricity Law), the public transmission and distribution of electricity are services provided by the government. The Federal Electric Commission (CFE), which before the energy reform was the sole actor in this industry, owns and participates throughout the chain of production by means of different subsidiaries created for this purpose.
Pursuant to the Electricity Law, activities related to the chain of production in electricity matters are carried out independently by these subsidiaries of CFE under conditions of strict legal separation between them.
ii Transmission/transportation and distribution access
Licensees that provide transportation and distribution services to third parties through pipelines, and that provide the storage of hydrocarbons, petroleum and petrochemicals, are obliged to provide open access to their facilities and services, with no discriminatory preferences, and subject to availability of capacity in their systems, according to the regulations issued by CRE.
Additionally, permit holders who have reserved capacity contracts and fail to exploit them or make them effective will be required to make them public and available in return for the authorised fees set by CRE.
In the electricity industry, distributed generation shall guarantee open access to the general distribution network, as well as access to the markets in which the power will be sold.
Additionally, CENACE, as manager of the electricity distribution and transmission system, must guarantee open access to the national network.
Fees related to the transportation and distribution of natural gas are determined by CRE by means of methodologies devised for those purposes. The fees are subsequently approved by CRE. Regulatory considerations related to fees will apply except for the activities related to public sale of liquefied petroleum gas, petrol and diesel.
Furthermore, terms and conditions for transmission, transportation and distribution activities are subject to prior approval by CRE. The terms and conditions will be part of the permit issue by CRE related to the above-mentioned activities. Terms and conditions reflect the common international practices for which they are being approved and must procure the competitive development of the markets while ensuring both the quality of services and that they are provided in an efficient, continuous and safe manner. Finally, as terms and conditions are part of the permit, when rendering their services permit holders may not agree conditions different from those approved.
Rates related to the selling of oil products have been liberalised by CRE, which has implemented, for such purposes, a liberalisation strategy that aims to set maximum selling prices by dividing the country into five different regions.
iv Security and technology restrictions
Although energy infrastructure has always been considered of strategic importance for the country's development, and thus the focus of very tight coordination between the federal, local and municipal authorities to protect and safeguard it, this coordination has not been affected by regulatory policies. All energy matters come under federal jurisdiction and there is no conflict, therefore, as to which authorities must attend to security and law enforcement.
Notwithstanding the above, for the past years there have been problems with criminal organisations, mostly in matters related to the illegal extraction and commercialisation of oil products from oil pipelines. As a consequence, new laws have been enacted by the Federal Congress to increase the criminal sanctions for those who participate at any point in the chain of illegal commercialisation of oil products.
Prior to the Mexican energy reform, all hydrocarbon and electricity infrastructure was solely owned by CFE and Pemex, and those government-owned companies, in coordination with the federal government, were in charge of securing all related infrastructure.
The law does not provide specific requirements for permit holders or exploration or extraction contractors in relation to security matters.
IV ENERGY MARKETS
i Development of energy markets
Certain energy-market activities, such as exploration or extraction of hydrocarbons, are subject to bidding procedures and may only be conducted following a bidding procedure and the award of a contract that allows private or government-owned companies to operate within a determined area or block.
Although CRE has already issued permits regarding the sale of oil products and some private companies have begun setting service stations throughout the country, the market, as it exists at present, is still dominated by Pemex franchises. This selling scheme has applied in Mexico for years, with Pemex as the sole participant in the exploration, extraction, refining, supply and distribution chain.
On the basis that the new legal framework for energy allows private participation throughout the productive chain, CRE has already issued permits for the commercialisation and public sale of oil products. As of 1 April 2016, imports of oil products and fuels into Mexico are permitted, and a new market related to these activities will emerge in the coming years.
Although the natural gas market is more organised and there are a vast number of private companies carrying on storage, distribution and sales of natural gas, it is important to bear in mind that first-hand sales of these products were also carried out previously exclusively by Pemex.
Organised electricity markets have just begun to emerge, with private participants starting to move into those areas of business permitted by law that, prior to the energy reform, were completely closed to private companies and foreign investment. Nevertheless, rules have already been set by SENER and calls to tender have been issued by CENACE for auction procedures to purchase and sell electric energy.
ii Energy market rules and regulation
Different regulations apply in the electricity and gas markets. For electricity markets, the main regulations are (1) the Electricity Law and its regulations; and (2) the Wholesale Electricity Market Guidelines (the Guidelines) issued by SENER.
The electricity market is regulated by CENACE. Pursuant to the Guidelines, individuals or companies that conclude contracts with this government body - as generators or commercial suppliers, among others - will be able to make transactions related to the purchase and sale of electric energy.
In the natural gas industry, CRE has issued a number of administrative rules with a view to regulating the market and the selling of natural gas products. Additional rules have also been issued by CRE in order to regulate downstream and midstream activities, mainly, for oil products (gasolines and diesel).
iii Contracts for sale of energy
Market participants are permitted to enter into individual contracts for the sale of natural gas as long as the terms and conditions of such contracts comply with the requirements established in the corresponding legal provisions (i.e., terms and conditions, and fees related to natural gas, which must have the prior approval of CRE).
Consideration has to be given to the details of each particular power-related operation, such as the means by which power will be delivered to the purchaser, because, as has been mentioned, interconnection to the National Electricity System requires a permit from CENACE.
In some cases, permits will be required for sellers (e.g., for the commercialisation of natural gas, or electricity generation permits) or for buyers (e.g., for storage of natural gas), therefore it is always advisable to review any energy contract prior to concluding it.
iv Market developments
The government's strategy is to attract as many potential investors as it can to participate in all energy activities, including those related to hydrocarbons and electricity. This strategy is being coordinated by SENER and the Ministry of Finance and Public Credit, with CNH and CENACE preparing and carrying out all hydrocarbon bidding procedures and electric power auctions.
The main developments in Mexico's energy markets concern oil and gas, as well as electricity. Seven tender procedures have been conducted by CNH resulting in the award of 38 exploration and extraction contracts, representing estimated investments of US$22.3 billion.
Additionally, CENACE has already concluded two electric auctions, following which approximately 33 companies have been awarded contracts.
V RENEWABLE ENERGY AND CONSERVATION
i Development of renewable energy
The most significant development related to renewable energies is the issuance of the Energy Transition Law published in the Mexican Official Gazette on 24 December 2015.4 The main purpose of this law is to promote the sustainable use of energy and set obligations related to clean energies and the reduction of polluted emissions.
Some of the most relevant aspects of the Energy Transition Law include:
- a to facilitate the gradual increase of clean energies in the electricity industry;
- b to establish mechanisms promoting clean energies and to reduce air emissions; and
- c support for the objectives of the General Law on Climate Change.
The referred law provides that SENER must have as its main goal a minimum participation of clean energies for electricity generation of 25 per cent for 2018, 30 per cent for 2021 and 35 per cent for 2024.
As noted above, following the two auctions by CENACE of long-term supply and purchase contracts, several contracts related to electric power and clean-energy certificates have been awarded.
According to SENER, of the planned 2,085MW increase in Mexico's electricity generating capacity 1,691MW will be related to solar energy projects, which will represent investments of at least US$2.6 billion.
Through the Energy Transition and Sustainable Use of Energy Fund, created to use and apply new technologies related to sustainable energy, new projects have been funded, including the solar-energy electricity-generation system installed in the state of Aguascalientes using 1,021 solar panels to supply energy for new electric vehicles that serve as public taxis in the city of Aguascalientes. This programme will help reduce CO2 emissions by 255 tonnes per year.5
ii Energy efficiency and conservation
The most significant change has been regarding the previously mentioned Energy Transition Law. This piece of legislation replaced the Development of Renewable Energy and Energy Transition Financing Law.
The current policies being implemented aim to attract investments to develop sustainable projects in Mexico and increase electricity generation by means of renewable energies.
According to SENER's Renewable Energy Prospects 2015-2029, Mexico has a proven and probable generation potential of 100,278GW per year. Solar potential is considered as being practically unlimited in terms of national energy consumption.
All policies related to renewable energies are aligned with the purposes and goals of the National Energy Strategy 2014-2028 published by SENER.
iii Technological developments
The development of renewable energy projects continues to be promoted by the Mexican government. Additionally, private companies have shown increased interest in investing in projects within different Mexico states.
In Mexico, there is an important research network dedicated to renewable energy that includes both public and private sector participation: this consultative council on renewable energy has been established by SENER to analyse and promote new projects.
Additionally, the Electrical Research Institute (IIE) has also promoted several projects aimed at encouraging and supporting technological innovation in the electricity sector, including among energy sector suppliers and users, through applied research, technological development and specialised services.
The IIE offers technological support to investors and evaluates the performance of photovoltaic and concentrated solar radiation conversion systems for industrial electricity generators. It also studies the generation of hydrogen using renewables, and its conversion to electricity through the use of fuel cells.
VI THE YEAR IN REVIEW
The year 2016 was an important one for Mexico regarding the energy industry. One major tender procedure for the awarding of 10 exploration and extraction contracts in deep waters was concluded, with eight contracts awarded to international companies. One farm-out contract for a major block in ultra-deep waters of the Mexican Gulf was also concluded, resulting in one contract to exploit jointly with Pemex - the block known as Trion. Additionally, three calls for tenders were announced and are currently being conducted by CNH.
Many permits related to downstream and upstream activities, mostly regarding selling, commercialisation and storage of oil products and natural gas have been granted by CRE so national and international companies may carry out such activities throughout the territory. Mexico has been able to attract private companies not just to participate in the above-mentioned tender procedures, but also to invest in infrastructure for midstream and downstream activities.
In the electricity industry during 2016, the two long-term electric auctions were conducted by CENACE and several contracts were awarded for the purchase of electric power and clean-energy certificates.
During 2016, CRE issued a vast number of administrative regulations in connection with the oil, gas and electricity industries, which together comprise the new legal framework for energy applicable to those industries in Mexico, and which will provide investors with legal certainty in connection with their activities in the country.
VII CONCLUSIONS AND OUTLOOK
As will be evident from this chapter, Mexico has great potential for investment in the oil, gas and electricity industries on account of having a considerable availability of resources.
The new Mexican energy legal framework was almost completed during 2016. The coming years will be important years for the industry in Mexico, since the hydrocarbon contracts awarded to private companies will be implemented and additional tender and auction procedures will be called, resulting in more contracts.
Additionally, the electricity contracts that have already been awarded will also be implemented in the coming years.
Important challenges may yet lie ahead for the full implementation of the energy legal framework, such as securing the surface rights needed to develop onshore fields for exploration and extraction of hydrocarbons, or to develop new infrastructure such as gas and oil pipelines. Nonetheless, Mexico is now prepared to welcome foreign investments and companies to implement one of its most significant constitutional reforms.