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Mexico's Energy Reform

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Transcript of Mexico's Energy Reform

Mexico's Energy Reform
Published at the Federal Official Gazette on December 20, 2013, the Energy Reform completely overhauls Mexico’s energy sector (the “
”), its related activities and the state-owned entities that currently monopolize almost all of the Sector’s activities;
Articles 25, 27 and 28 of the Mexican Constitution are amended in order to allow the private sector’s involvement in the Sector’s activities;
Twenty-one provisional articles particularly specify the transition process of the Sector.
Open and upgrade the Sector to attract domestic and foreign investment, know-how, technologies and methods to boost the Mexican economic growth on the following years.
The Reform
The Mexican State may either:
(i) assign in favor of the “productive” State companies (PEMEX or subsidiaries) the rights to perform oil and hydrocarbons’ related activities (this is known as the “
Round Zero
” in favor of PEMEX); or
(ii) enter into contracts with PEMEX or any private parties for the same purposes.

PEMEX will also be able to enter into contracts or joint ventures with private parties for the performance of its activities, or request for its current contracts and assignations to be transformed into other type of contracts, in which the private sector may participate.
Private parties may participate through permits granted by the Mexican
Energy Regulatory Commission
, in the following activities:
oil treatment and refining;
natural gas processing;
storage, transportation and distribution of oil, gas, oil resources and petrochemicals.

The wholesale market of the products will also be regulated.
The Reform lifts the restriction placed against the private sector on the generation of electricity for sale by removing the condition of such activity as a public service.

Private entities, through permits granted by the
Energy Regulatory Commission
, are expected to be able to fully participate and compete in the electricity generation in a free market environment.
The Mexican State will preserve its exclusive role as a public service provider of electricity’s transmission and distribution, as well as the planning and control of the national electric system.

However, private entities may enter into contracts with the State for the financing, installation, maintenance, managing, operation and expansion of the infrastructure needed for such public service.
Contractual framework and private sector’s profit.
The contractual framework to be further detailed in a subsequent regulatory law shall include,
among others
: (i) service contracts, (ii) profit-sharing contracts, (iii) production-sharing contracts, and (iv) licenses for the performance of exploration and exploitation activities on behalf of the State. The State will decide which option is most suitable for each particular case, in order to capitalize its own profits.

The fees to be paid will also be decided by the State, but shall include the following methods of payment: (i) cash, for services contracts; (ii) a profit percentage, for profit-sharing contracts; (iii) a percentage of the output production, for production-sharing contracts; (iv) the transmission of the extracted hydrocarbons’ ownership (after the payment of any applicable fee or tax), for licenses, or (v) any combination of the foregoing.
Booking of reserves
Private entities entering into contracts with the State or with PEMEX may report, for accounting and financial purposes, the corresponding assignation or contract and their expected benefits.

The aforementioned private parties will be bound to assert at their respective contracts, that the ownership of the subsoil oil and hydrocarbons belongs to the State.

How to participate?
Private parties wishing to participate in these activities can choose from the following approaches:
Incorporating a Mexican company;
Registering a Mexican branch of a foreign company;
Appear directly as a foreign company/individual;
Joint venture with a Mexican partner.
In order to be awarded a contract with the Mexican State or with PEMEX, the private parties must participate in the public bids that the
National Hydrocarbons Commission
will organize.

For such process, it is important to consider the following aspects:
Contract and bidding Mexican authority;
Term of the services and their location;
Applicable bonds;
Powers of attorney;
Legalization or apostille of documents;
Anti-corruption framework.
New regulatory laws shall be implemented with the purpose of regulating the contractual framework applicable to the private sector’s involvement at the activities of the electric sector and to regulate the electricity wholesale market.

Prior to the Reform, only the power generation via electric auto generation, cogeneration, IPP and small generation was allowed to the private sector; with the amendments, private parties with the permission granted by the
Energy Regulatory Commission
and under the supervision of the
Mexican Ministry of Energy
, can now freely generate power.
December 20, 2013
Energy Reform published at the Federal Official Gazette
90 calendar days
(March 23, 2014)
PEMEX must evidence its exploration and extraction capacity to the Ministry of Energy, and request the assignment of exploration areas and extraction fields (Round Zero). The Ministry of Energy will have 180 days after each request, to issue its corresponding resolution.
120 calendar days
(April 22, 2014)
The Mexican Congress must enact the secondary laws that may be necessary to:
(i) regulate the legal and contractual frameworks related to the Sector;
(ii) establish the minimum guidelines and percentages of national participation in the assignments and contracts;
(iii) perform the necessary operative and management changes to the current regulatory entities;
(iv) create the National Agency of Industrial Security and Environment Protection of the Hydrocarbons Sector;
(v) set the guidelines for the transformation of PEMEX and CFE into productive State companies; and
(vi) create the framework for the anti-corruption supervision of the Sector.
12 months
(December, 2014)
The Mexican Congress shall promote, through amendments to the law, the use of clean energies, efficiencies and better practices at the Sector, as well as the regulation of geothermal energy;
Likewise, during the year of 2014, the Mexican Oil Fund for Stabilization and Development shall be created and operate in 2015.
12 months after the enactment of Regulatory Laws
(Within Q1-Q2 2015)
The Federal Executive Branch shall decree the formation of:
(i) The National Center of Natural Gas Control; and
(ii) the National Center of Energy Control.
2 years after publication
(December, 2015)
PEMEX and CFE shall already be transformed into "productive State companies"
PEMEX and CFE will be transformed from state-owned companies into productive State companies, competing in the marketplace with new objectives, management and corporate governance structures;

The Mexican Ministry of Energy will be in charge of assigning, under certain conditions and proceedings, the exploration and exploitation rights of the Round Zero to PEMEX, as well as designing the contracts and the guidelines for the public bidding of contracts and granting of permits for the activities of oil treatment and refining, and for the natural gas processing. Regarding electricity, it will oversee the operation of the sector;

The National Hydrocarbons Commission will provide technical assistance to the Ministry of Energy; it will manage the public bids of contracts, awarding and executing contracts with private entities, and it will oversee and regulate the exploration and exploitation of hydrocarbons;

The Energy Regulatory Commission will now regulate and grant permits for the storage, transportation and distribution of oil, gas, oil resources and petrochemicals, as well as regulate the wholesale of such products. Regarding electricity, it will grant and regulate the permits to private entities for electricity generation and the fees for transmission and distribution of electricity;

The Mexican Oil Fund for Stabilization and Development shall be created as a public trust responsible for receiving, managing and distributing any revenue of the oil & gas contracts and assignments;

The National Center of Natural Gas Control will be created and responsible for operating the Mexican pipeline network, as well as acquiring the contracts and rights of PEMEX in that area;

The National Center of Energy Control will be created and responsible for operating the national electric system, the electric wholesale market, and granting the free access to the transmission and distribution grids, mostly in substitution of the CFE;

The National Agency of Industrial Security and Environment Protection of the Hydrocarbons Sector will be created and responsible for regulating and overseeing the activities of the Sector, the waste disposal and the protection of the environment.

Private companies and/or individuals can now participate in the activities of the upstream oil sector, as well as in the midstream and downstream sectors.

Private entities are expected to be able to fully participate and compete in the electricity generation in a free market environment, and/or enter into contracts with the State for the financing, installation, maintenance, managing, operation and expansion of the infrastructure needed for the distribution and transmission of electricity.

The Mexican Congress will enact within the next months, a special anti-corruption framework for the Sector and its activities.

Nevertheless, the Mexican Federal Anti-Corruption Law in Public Contracts which became effective in June of 2012, very similar to the FCPA, is also applicable, since it imposes liability to individuals and entities participating in federal procurement contracts and sanctions them in case they (among other actions) offer or deliver money or carry out any action directed to cause or force a public officer or any other individual to directly grant or at least favor such individual in a federal procurement contract.

© 2014 J.A. Treviño Abogados S.A. de C.V., Monterrey, N.L. México.

Contractual framework and private sector’s profit.
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