backThe Mexican government published in the , its official daily gazette, a Decree amending Articles 25, 27 and 28 of the Constitution (the Decree). The Decree became effective on December 21, 2013 (the Effective Date) and, except as set forth below, requires that the government further enact implementing legislation within 120 days thereof.A. Upstream Activities
While all types of subsoil hydrocarbons are still owned by the Mexican Nation, domestic and wholly-owned foreign companies may now directly engage in the exploration and production (E&P) of conventional or unconventional liquid, solid and gaseous hydrocarbons, onshore or offshore. To obtain income that contributes to the long term development of the Nation, the State will conduct oil and gas E&P activities by (a) assigning contract areas to a state company (referenced in the Decree as an or EPE), including (Pemex), or (b) granting or entering into a host government instrument or agreement with an EPE or private party. Under certain conditions, an EPE will be able to enter into E&P subcontracts with private parties to fulfill its obligations under an assignment it has received from or contract it has entered into with the State.
E&P activities remain strategic to the States interests in terms of internal revenue and energy security.
1.Assignments
a.Concept
Under and assignment structure, the (Secretariat of Energy) assigns to an EPE its constitutional right to explore and exploit hydrocarbons in a particular contract area and the EPE performs such activities therein on its own or through a subcontract with a private party. The Secretariat of Energy may require that the EPE pay consideration for the assignment and obtain its consent to further subcontract with a private party.
b.Granting Process
The broad language of the Decree suggests the Secretariat of Energy will be able to assign contract areas unilaterally or at the request of an EPE that is willing and able to take on the project covered by the assignment. Pemex is granted the prior right to request an assignment of the areas it currently explores or exploits, provided it makes such a request within 90 calendar days from the Effective Date and demonstrates it possesses the technical, financial and operational capacities to explore and exploit hydrocarbons from such areas in an efficient and competitive manner. The Secretariat will review Pemexs application, and with the technical assistance of the (the CNH), issue its resolution within 180 calendar days after the application date, in any case establishing the surface and depth of the contract area and the terms applicable to the assignment.
i.Areas Currently Under Exploration
In areas on which Pemex, as of the Effective Date, has made a commercial discovery or investment, Pemex may be allowed to continue with exploration activities for three more years (with a two year extension if Pemex fulfills the applicable exploration program and other technical conditions are met), Pemex has the required funds to (A) continue with such activities and proposes an acceptable exploration program for each area it seeks, and (B) if successful, engage in production activities. Pemexs failure to comply with an exploration program will trigger a reversion of the applicable contract area to the State.
ii.Areas Currently Under Production
Pemex will maintain its right to exploit an area from which it produces hydrocarbons as of the Effective Date and must deliver to the regulator a development plan for such area which includes a description of development work and investments.
iii.Assignments in Same Contract Area
To maximize the development of the countrys natural resources, the Secretariat may make two or more assignments in the same contract area covering hydrocarbons located at different depths.
2.Contracts
a.Concept
The CNH will enter into all contracts for the E&P of hydrocarbons under Article 27. While the Decree restricts the granting of concessions, it allows the CNH to enter into any type of E&P contract, including, without limitation:
i. a service contract, under which the contractor may be paid a fee for its services;
ii. a profit-sharing contract, under which the contractor may be paid with a share of profits;
iii. a production-sharing contract, under which the contractor may be paid with a share of production; and
iv. a license, under which the licensee may take title to the hydrocarbons it produces in exchange for a payment to the government.
Any particular contract may provide for a mixed form of compensation ( a combination of two or more of the foregoing forms).
b.Award Process
The CNH will award contracts to EPEs and private parties pursuant to a bidding process. The Secretariat will design the technical aspects of the contracts and such process.
c.Booking Reserves
A private party may report, for accounting and financial purposes, its contract and its expected benefit, provided the contract states that all solid, liquid and gaseous hydrocarbons under the ground are the property of the Nation.
d.National Content
Implementing law will set forth national content rules and percentages in all contracts, which in any event will be subject to applicable international treaties and commercial accords.
3.Conversion of an Assignment to a Contract
Pemex may at any time request that a contract area being explored or exploited by Pemex under an assignment structure, be explored or exploited under a contract structure. In any conversion, the CNH will conduct a tender under applicable law if Pemex elects to enter into a contract with a private party. The Secretariat of Energy will establish the technical and contractual terms for the tender and the (the Secretariat of Finance) will establish its fiscal terms.
4.Surface Use
E&P activities are deemed strategic to the Nation, and as a result they will be preferred over all other activities that relate to the use of the surface and subsoil in a contract area. Implementing law will establish mechanisms that facilitate the concurrent performance of all such activities, provided it is technically feasible. Existing and future mining concessions will not grant the concessionaire the right to explore or exploit solid, liquid or gaseous hydrocarbons, without prejudice to a concessionaires rights thereunder.
B. Midstream and Downstream Activities
Private parties may participate in activities relating to (1) the treatment and refining of petroleum and the processing of natural gas, subject to the issuance of a permit for such activities by the Secretariat of Energy, (2) the storage, transportation and pipeline distribution of crude oil, natural gas, petroleum products and petrochemicals, subject to the issuance of a permit by the (the CRE), and (3) first-hand sales of the resources and products described in item (2) above. Such activities will be further regulated in implementing legislation.
In the gas sector, the Decree requires that, following 12 months after the enactment of the new Law Regulating Article 27 of the Mexican Constitution in Petroleum Matters, the executive branch submit to Congress a bill for the creation of the Centro Nacional de Control de Gas Natural (the Gas Operator), a public instrumentality that will operate the national natural gas pipeline and storage system. To achieve this, Pemex will have to transfer all of its pipeline and storage infrastructure to the Gas Operator and assign it all transportation and storage contracts it currently has with third parties.
C. Empresas Productivas del Estado (EPEs)
Implementing legislation will govern EPEs. An EPE is a company created, owned and controlled by the federal government for the purposes of conducting governmental businesses, including oil and gas E&P activities. Each EPE that engages in such E&P activities:
will have budgetary autonomy, subject only to its balance sheet and a ceiling for personal services it may contract for;
will be organized according to international best practices, ensuring its technical and managerial autonomy;
will be subject to a specific regime applicable to its acquisitions, leases, services and public works, public debt and administrative responsibility; and
will be managed by a board formed of five state members, representatives of the federal government (including the Secretary of Energy), and five independent members; among other characteristics.
The government will transform Pemex into an EPE within a transitional period of time and under certain conditions to be determined in implementing legislation. During such period, Pemex will be able to receive contract area assignments from the federal government, but will not have budgetary nor managerial autonomy until its board is appointed in accordance with the foregoing.
D. Oil and Gas Administration
1.Energy Policy
The Secretariat of Energy will establish, conduct and coordinate Mexican energy policy. Among various other powers, the Secretariat of Energy will be empowered, through implementing legislation, to:
a. with the technical assistance of the CNH, adjudicate assignments of contract areas and select the areas that will be subject to contracts;
b. design the technical aspects of the contracts and tenders for the award of such contracts; and
c. award permits for the treatment and refining of crude oil and processing of natural gas.
2.Regulators
a.Upstream
The CNH is the upstream regulator. Among various other powers, the CNH will be empowered, through implementing legislation, to:
i. provide technical assistance to the Secretariat of Energy;
ii. compile geologic and operational information;
iii. authorize recognizance and superficial exploration services;
iv. conduct tenders, and award and enter into E&P contracts;
v. administer technical aspects of assignments and contracts;
vi. supervise development plans; and
vii. regulate E&P activities.
The CNH will be managed by seven members. Each of the current five members will remain in office until his or her respective term expires, and may only be removed for a serious cause. Each new member will be appointed by the vote of two thirds of the members of the (a legislative body akin to the US Senate) from a shortlist of candidates submitted by the President of Mexico.
b.Midstream and Downstream
The CRE is the midstream and downstream regulator. With respect to oil and gas matters, the CRE will be empowered, through implementing legislation, to:
i. regulate and award all permits for the storage, transportation and pipeline distribution of crude oil, natural gas, petroleum products and petrochemicals;
ii. regulate third party access to transportation pipelines and facilities for the storage of hydrocarbons and byproducts; and
iii. regulate the first-hand sales of the foregoing.
The CRE will be managed by seven members. Each of the current five members will remain in office until his or her respective term expires, and may only be removed for a serious cause. Each new member will be appointed by the vote of two thirds of the members of the (a legislative body akin to the US Senate) from a shortlist of candidates submitted by the President of Mexico.
c.Environmental
The (the Agency) will be created to regulate and supervise, in matters of industrial and operational security and environmental protection, all activities performed by EPEs and contractors in the upstream, midstream and downstream oil and gas sectors and all facilities used in connection therewith, including the decommissioning and abandonment of facilities and waste disposal.
d.Autonomy
Implementing legislation will grant each of the CNH and CRE status as a legal person, and technical and managerial autonomy. The Agency will be an agency of the (the Secretariat of the Environment), and will only be granted technical and managerial autonomy.
Each of the CNH, CRE and the Agency will be able to use, at its discretion, the funds it receives from the federal government, as approved by the (a legislative body akin to the US House of Representatives), and the revenue it generates from the services it provides in connection with its governmental powers, including, in the case of the CNH and CRE, the issuance and administration of permits, authorizations, assignments and contracts, as applicable, as well as for any services each provides in connection with the (the CNIH), the repository of all information relating to seismic acquisition, geological formations and the results of E&P activities.
3.Oil and Gas Revenue
a.Administrator
The (the FMP), a public trust under which the (the Central Bank) will serve as trustee, will be established by the Secretariat of Finance sometime in 2014 and commence operations in 2015. The trust will receive and administer all government revenue generated pursuant to E&P contracts, except for taxes payable to the treasury (the Revenue).
b.Technical Committee
The FMP will be managed by a seven member technical committee (the Committee), three of which will be representatives of the State and four of which will be independent. The State members will be the Secretary of Energy, the Secretary of Finance (who will serve as President of the committee) and the Central Banks governor. The four independent members will be appointed by the President, subject to the approval of two thirds of the members of the .
The Committee will be empowered, among other matters, to:
i. determine the policy applicable to its long-term investments;
ii. instruct the trustee to make all transfers to the treasury, as described in subsection (c) immediately below; and
iii. recommend to the the manner in which the funds described in subsection (d) below should be apportioned among the authorized uses.
c.Use of Revenue
The FMP will apply all Revenue as follows:
i. , to pay all compensation due to assignees and contractors under E&P assignments and contracts;
ii. , to transfer funds, in a maximum amount to be determined at a later date, to the (the Federal Stabilization Trust), a trust fund established to capture excess oil and gas revenues;
iii. , to transfer funds, in an amount to be determined at a later date, to the , a trust fund established to compensate the Mexican states for the various impacts oil and gas activities have within their territories, and any other trust formed to finance research in the areas of oil and gas, energy sustainability, and oil and gas auditing;
iv. , to transfer to the Mexican treasury the funds required to maintain the amount of oil and gas revenue the federal government uses to finance the national expenditures budget at a level equal to 4.7% of the gross domestic product (which is equal to the proportion of oil and gas revenue to gross domestic product reached in 2013); and
v. to make long-term investments with all remaining revenue, including investments in financial assets.
d.Authorized Use of Proceeds from Long-term Investments
In any given year, the FMP may use the accumulated balance of FMPs long-term investments as follows:
i. up to an amount equal to 10% of any increase in the balance of FMPs long-term investments reached in the previous year, to fund a universal pension system;
ii. up to an amount equal to 10% of the increase in the balance of FMPs long-term investments reached in the previous year, to finance investment projects in science, technology and innovation, and renewable energy;
iii. up to an amount equal to 30% of the increase in the balance of FMPs long-term investments reached in the previous year, to fund an investment vehicle specializing in oil and gas, and infrastructure projects; and
iv. up to an amount equal to 10% of the increase in the balance of FMPs long-term investments reached in the previous year, to fund scholarships for college and graduate school studies;
, the balance of FMPs long-term investments is equal or greater to three percent of the gross domestic product of the previousyear. 1 Under no circumstances may the FMP use any such funds if as a result of such use, the balance of its long-term investments is reduced below three percent of the gross domestic product of the previous year. The FMP will distribute to the treasury any revenue it obtains from its long-term investments that exceeds 10% of the gross domestic product for the previous year.
e.Extraordinary Use of Proceeds from Long-term Investments
In any given year, if (i) government income decreases significantly in connection with a fall in the countrys gross domestic product, a steep reduction in the price of crude oil or a fall in the oil production base, and (ii) once the funds of the Federal Stabilization Trust have been depleted, the may approve, by the vote of two-thirds of its members present, the use of the balance of the FMPs long-term investments to fund the national expenditures budget even if as a result of such use, such balance is reduced below three percent of the gross domestic product for the previous year.
[1] Transitional Article Fourteen, third paragraph.