Mexican proposal seeks Pemex profit-sharing

A proposal for hydrocarbon revenue by Mexican President Enrique Pena Nieto provides a hint about a possible structure for oil and gas investment by outsiders in Mexico, says a legal update by the law firm Mayer Brown.

The proposal, part of broader tax-reform legislation, would reduce the tax burden on state-owned Petroleos Mexicanos and establish a profit-sharing structure.

In August, Pena Nieto proposed historic energy-law reform that would allow foreign participation in the Mexican oil and gas industry for the first time in decades (OGJ Online, Sept. 13, 2013). That proposal focuses on constitutional changes and leaves decisions about terms of foreign participation to the Congress.

The new proposal on hydrocarbon revenues would introduce profit sharing for activities by Pemex, which Mayer Brown estimates paid taxes at an effective rate of 99% last year. It provides a roadmap for decreasing Mexico’s economic dependence on oil profits and attempts to provide Pemex financial and operating freedom to function more as an independent company.

“This will not happen overnight,” the law firm says.

Through profit-sharing, the proposal aims to provide Pemex the incentive to increase production.

“As Pemex becomes more production-focused, more opportunities for the private sector would certainly arise, including associations and joint ventures with Pemex,” Mayer Brown says.

The proposal doesn’t refer to private parties but “does provide a glimpse of what a profit-sharing regime could look like for the private sector,” the firm says. It would establish a trust responsible for allocating hydrocarbon profits between the government and Pemex.

“This trust would logically also be in charge of distributing hydrocarbon profits to private parties under profit-sharing contracts,” Mayer Brown says.

The profit-sharing regime would give the Ministry of Energy flexibility to vary profitability of contractual areas to attract investment.

If passed, the law would become effective Jan. 1, 2015.

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