Last week the Mexican Congress approved legislation including Constitutional amendments that were approved by the required number of Mexican states on December 16 that will bring changes to the nation’s energy laws that exploration and production companies have hoped for ever since Mexico nationalized the oil and natural gas industry in 1938. But the legislature did not just stop there – the legislative changes have also opened the door to private investment in the midstream and downstream oil and natural gas sectors and increased opportunities for private investment in the electric power sector as well. There will undoubtedly be myriad devils in the details of the implementing legislation, not least of which will be developing forms of contract that will be needed in a very short time frame under the law.
Since nationalization, Petróleos Mexicanos (Pemex) has enjoyed a monopoly over all oil and natural gas exploitation in Mexico, although it has for several years been permitted to award service contracts to private contractors under which it paid fees but did not share in production or profits. Under the new regime, Pemex will have the right under a “Round Zero” to pick fields it wishes to develop on its own and those for which it wishes to seek partners, and it will also be allowed to migrate from sole development to a partner model for specific fields. Mexico is also planning to offer fields to private companies without Pemex participation and to new exploration and production (E&P) entities to be formed by the government. Secondary legislation will be needed to define the rules applicable to these different approaches to development, but the law provides for use of service contracts, profit-sharing contracts, production-sharing contracts, license agreements or a combination of these structures. Of great importance to many investors, the new law also allows companies to book reserves in accordance with United States Securities and Exchange Commission regulations.
The Mexican Congress has expanded the reach of these reforms beyond E&P. The Ministry of Energy will now be able to issues permits to private industry for refining and petrochemical activities, and the Energy Regulatory Commission will now issue permits to private companies for transportation, storage and distribution of hydrocarbons. Although the reforms maintain Comisión Federal de Electricidad (CFE) control over transmission and distribution of electric power, the new law aims to encourage private investment in generation. The new law provides that power generation is no longer a public service, with the implication that private participants will now have greater opportunities to pursue power projects in Mexico. Significantly, the reforms establish a path for the creation of an independent system operator, which will remove the control the CFE currently has over that sphere.
The Mexican Congress has 120 days to enact the supporting legislation, and the executive branch has 365 days to create a regulatory regime. Beyond that, regulators will also have to develop contracts for the new structures. The direction these details will need to take from the bill that has just been passed, though, gives industry participants a great deal to celebrate.