Mexico: President Submits Energy Reform Bill to Congress

In a historic move for the Mexican energy industry, President Enrique Peña Nieto recently submitted to Congress a bill of amendments for a major overhaul of the energy sector. The bill is the beginning of a series of changes to federal legislation in need of reform, and sets out the basis for a new perspective in the operation of both the oil and gas industry and the power sector.

The bill proposes amendments to Articles 27 and 28 of the Constitution in order to reorganise the energy sector and open several new areas to private participation.

While confirming state ownership of all domestic hydrocarbons and maintaining the prohibition on concessions for oil and gas exploration and production, the bill proposes to emulate schemes that have been successful in most countries with state-owned resources, such as Norway, Brazil, Colombia and several Middle Eastern countries. The proposed amendments are intended to permit:

• execution of profit sharing agreements with international and domestic private companies for the exploration and production of oil and gas, both onshore and offshore – such agreements may be administered by the upstream regulator, rather than Mexican Petroleum (Pemex), as the bill contemplates that these agreements will be executed by the state;
• the opening of the full midstream and downstream market to the private sector, including refining, transportation, storage and distribution of oil and refined products – the private sector would participate through a permit regime similar to that implemented for the downstream opening of the natural gas sector, with the Energy Regulatory Commission as the expected regulator; and
• the restructuring and transformation of Pemex into a commercially oriented organisation, coupled with subsequent tax reform (to be implemented in September 2013) that will allow Pemex to operate on a for-profit basis and reinvest in its projects, rather than operating as a revenue unit of the federal government.

The proposed amendments related to the oil and gas sector are intended to:

• increase oil and gas production through the development of deep water and shale oil and gas reservoirs, and improve recovery rates in mature fields, among others, while sharing investments, technologies, risks and profits with the private sector;
• reduce the import of fuels and increase the country's refining, processing, transportation and distribution capabilities;
• guarantee national energy security; and
• reduce fuel costs.

With respect to the power sector, the bill aims to provide a constitutional basis for the creation of a new independent system operator, a competitive wholesale power market and clean energy certificates while maintaining the state's control and ownership of the national grid and its exclusivity with respect to power transmission and distribution activities, but with the express possibility of entering into contracts with private parties to assist in the development of such activities. The bill will open the market to merchant power plants that sell their bulk power, where the independent system operator dispatches the system on the basis of cost efficiency and transparency; this is expected to affect the cost of power to the end user, thereby reducing the price differentials that the industrial and residential sectors have with respect to other sectors.

The amendments are intended to provide a basic framework to ensure adequate operation of the National Electric System, based on transparent interconnection and dispatch rules that provide market participants with non-discriminatory access to the grid. These rules will be coupled with the imposition of new rules and obligations for the promotion of clean energy, competition and a more efficient provision of electric power public utility services, along with a substantial reduction in grid losses.

One important change is that the oil and gas industry and the electric power industry (both vertically integrated and entrusted to Pemex and the Federal Electricity Commission (CFE) under the Constitution) will no longer be considered strategic industries. Accordingly, all parties will be free to participate, except in activities expressly reserved for the state under the new Article 27 of the Constitution (ie, nuclear power, power transmission and distribution as a utility service and the dispatch and operation of the National Electric System to be controlled by the independent system operator). This suggests that Pemex and the CFE should no longer be considered decentralised public bodies, opening the door for transforming them into another type of state-owned company – one that is commercially oriented and may undertake strategic alliances through the execution of joint venture agreements.

Although the bill does not include specific language for many of the expected changes in the energy sector (which will be implemented through future amendments to the secondary laws and regulations), it constitutes an unprecedented effort to eliminate some of the most important barriers that have limited the participation of private players in the industry.

These highly anticipated reforms have been largely welcomed and, supplementing the reforms recently proposed by the National Action Party, have provoked calls for further liberalisation of the sector. The need for reform has a consensus in Congress and the bill is likely to move forward.

For further information on this topic please contact Rogelio López-Velarde, Jorge Jiménez or Amanda Valdez at López Velarde, Heftye y Soria by telephone (+52 55 3685 3334), fax (+52 55 3685 3399) or email (rlopezv@lvhs.com.mx, jjimenez@lvhs.com.mx or avaldez@lvhs.com.mx).

This article was originally published in the Energy & Natural Resources Newsletter of the International Law Office - www.internationallawoffice.com.