The last few months have brought turmoil to a head in México as the recently elected government of President Enrique Peña Nieto pushed the energy reform, long overdue, into the fast track process. This has required the modification of the Mexican Constitution in its Article 27 which reserved all Mexican natural resources to belong to the exclusive development of state owned entities, barring all private initiatives.
This has now changed allowing private enterprise and investment to participate in the market and in the process strengthening the role of renewable energies and distributed energy generation.
In short, the major points of the newly enacted law are:
1. PEMEX and CFE will be decentralized to "productive state enterprises” organisms whose operation will be based on criteria of effectiveness, efficiency, honesty, transparency and productivity based on best practices in their respective fields. During the transition of the regime, PEMEX and CFE may enter into individual private contracts under the new legal framework.
2. PEMEX and CFE shall calculate personnel compensation in equal conditions to those in the private industry or activity concerned. However, the labor rights of workers currently enrolled in the template of PEMEX and its subsidiaries will be fully respected. The new criteria for pay and benefits will take effect from the date of the reform.
3. The rule states that the mechanisms for contracting schemes recognize that oil is owned by the state and inalienable and imprescriptible character, so a concession scheme remains prohibited.
4. The state will conduct the exploration and production of hydrocarbons (liquid and gas) through allocations state owned enterprises or through contracts of these with private enterprises, according to the terms specified in the Regulatory Law. Productive state enterprises may also contract with the private sector.
5. In the exploration and extraction of hydrocarbons, four basic contractual models are established :
- Service (cash operations)
- Profit sharing (payments made with a percentage of shares not yet formally established)
- Production sharing (with payments made according to a percentage of output which is not yet formally established)
- Licenses (with payments made through the transfer of production of oil once these have been extracted to the surface)
- A combination of the four options is also possible.
6. SENER (Mexican Department of Energy) will be authorized to issue permits for the processing and oil refining and treatment of natural gas. That is, once extracted from ground, the oil may be sold by some in possession of the product, with the intent of processing and distributing it, even within national territory.
7. The Ministry of Finance shall determine the conditions for the fiscal terms of contracts and tenders in exploration and exploitation of hydrocarbons issuing the SENER.
8. The CNH (National Commission of Hydrocarbons) will provide technical advice to the SENER. Also authorize recognition services and surface exploration, conducting tenders, allocation of winners and signing of contracts for exploration and production of hydrocarbons , monitoring of mining plans that maximize the productivity of the reservoir in time and regulation in the exploration and extraction of hydrocarbons .
9. The CRE (Commission for the Regulation of Energy) will have authority to issue permits for storage, transport , distribution pipeline of petroleum, natural gas , commercial, oil natural gas, the regulation of third party access to pipeline transportation and storage of oil and regulation of first-hand sales thereof.
10. PEMEX will submit for the consideration of SENER, within 60 calendar days after the adoption of the decree, which areas in exploration and which production fields in the currently still decentralized Agency is enabled to operate through assignments. SENER will be allowed a period of 180 calendar days to give its verdict. This is what is called Round Zero . This will not necessarily apply to future projects.
11. PEMEX could continue working on current projects in exploration for a period of three years , extendable for an additional 2 more years . If successful in the expected results, PEMEX could continue the extraction activities. Otherwise, the state will retract the projects to eliminate or reassign them.
12. If in the process of awarding allocations "the directly affect PEMEX investments , these will be recognized at fair value in economic terms provided for that purpose by the [ SENER ]".
13. In a period not exceeding twelve months from the entry into force of the new Law Regulating Article 27 of the Constitution, the Executive will need to create a decentralized public body called the National Center for Control of Natural Gas, responsible for the operation of the national pipeline system transport and storage.
14. The new law instructs the Executive body to propose to Congress a program of substitution of generalized subsidies targeted at stimulating the energy sector .
Mexican Petroleum Fund (FMP)
15. In essence, the FMP will manage oil revenues, except contributions. The trust was constituted in 2014 to begin operating in 2015. It will be a public trust with the Bank of Mexico as trustee.
16. The Technical Committee will have 3 members FMP state representatives and two independents: the State shall be the Secretary of the Treasury, who will chair the Committee , the Secretary of Energy, and the Governor of the Bank of Mexico . The two independent shall be appointed by the President and confirmed by the Senate.
17. Royalties from oil extraction activities will be channeled to the Stabilization Fund and Federal Oil Revenue Stabilization. Also, after paying contractors, resources must be transferred to the Fund for the Extraction of Hydrocarbons, the research funds of hydrocarbons and energy sustainability, and on oil monitoring, and other specific locations to be determined by law.
18 . Once the expenses of the above funds are covered, the remaining funds will be allocated to the Ministry of Finance (SHCP) to cover budget deviations under the provisions of the Expenditure Budget (Presupuesto de Egresos). After which, the annual inflows to the FMP will be allocated to long-term savings (investment in financial assets, financial liabilities reduction linked to Public Sector Borrowing Requirements of the previous year in question and repayment in advance of the government debt ) .
19. The Nation will retain exclusive control of the national grid (Sistema Eléctrico Nacional), which will be operated by the appropriate body, as well as public service transmission and distribution - concessions in these activities will not be granted, without prejudice in that the Nation may enter into contracts with private enterprises in terms that will be established by secondary legislation. The words "generate" , "drive" , " transform" and " cater " are removed from the article of the Constitution as belonging exclusively to the Nation.
20. The generation and sale of electricity will be open to the participation of individuals who make use of the transmission and distribution networks to market their energy production .
21. SENER will establish the terms of strict legal separation in electricity to promote open access sector, and Congress should adjust the regulatory framework in which the CRE operate.
22. Within 120 calendar days after the entry into force of the Act to regulate the electricity industry, the President shall establish the National Energy Control Center , which will be responsible for the operational control of the national electricity system , operating the wholesale market, and guarantee the equal access to transmission and distribution. CFE shall provide the human and material resources to the Center for the operation of the system and it will be independent from the CFE.
23. SENER will continue as a decentralized administrative body, although it will be provided with its own legal personality, technical and managerial autonomy .
24. The concept of "sustainability” is entered into Article 25 of the Constitution so that economic development takes into account the ecological environment .
25. In the secondary legislation, Congress should create a National Industrial Safety Agency and Environmental Protection of Oil Sector as a decentralized administrative body of SEMARNAT, with technical and managerial autonomy.