Navigating new Mexican energy laws will be challenging
Nicolas Borda, Greenberg Traurig LLP, Houston and Mexico City
US energy companies are beginning to understand that benefiting from the massive energy reform taking place in Mexico will depend upon an in-depth understanding of the "alphabet soup" that the Mexican government has constructed in the effort to facilitate the vast economic undertaking of reforming Mexico's energy industry. This has meant revamping existing government entities and establishing a series of brand new entities. Navigating among them will be challenging; having a playbook on hand may help.
It is important to understand, first of all, that Mexico is trying to accomplish in one year what Colombia did in two years and Brazil, in four-that is, changing the country's legal structure to permit foreign companies to invest in production of oil and gas, and proceeding to the first exploration and production bidding process. This in itself is an astonishing goal that, when achieved, will evoke the admiration of the world's energy industry.
The new and revamped agencies are intended to make that rapid transformation possible. No longer will all aspects of the Mexican energy industry be controlled by a couple of gigantic, mysterious, and even byzantine government entities. Mexico has been able to take advantage of the "best practices" of other countries in constructing this new system. The Round Zero process, for example, by which Petróleos Mexicanos (Pemex) was awarded productive acreage, followed the Colombia model. The concept of the creation of the Petroleum Fund for Stabilization and Development, as a means of receiving, managing, investing, and distributing revenues from entitlements to Pemex and income from the new E&P contracts, was derived from Norway.
From the United States came the plan to supervise upstream production through two different agencies. Thus, Mexico's old Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE) has been split into two parts: the Bureau of Safety and Environmental Enforcement (BSEE) to oversee health, welfare, and safety issues, and the Bureau of Ocean Energy Management (BOEM) to supervise oil and gas activity.
The National Agency for Industrial and Environmental Protection (ANSIPA) is tasked with preventing a harmful conflict of interest between the desire to maximize production and revenue and the need to supervise industry health, safety, and welfare. ANSIPA will also dismantle and decommission wells and control the emission of pollutants.
Some of the changes in the governmental framework have been in process for some time. For example, the new federal agency that will supervise bid rounds, the National Hydrocarbon Commission or Comisión Nacional de Hidrocarburos (CNH), was established six years ago. In its earlier incarnation the CNH was a regulatory agency within the larger Ministry of Energy with no economic or political power to supervise the many complex aspects of the bidding process.
Two new commissioners have been added to the CNH, and the reorganized body now can rely on the expertise of the commissioners and staff to accomplish the immense task of regulating and supervising exploration, managing bid rounds, awards and contracts, supervising the execution of contracts, and providing technical advice to the Ministry of Energy.
The Ministry of Energy, or Secretaría de Energía (SENER), will be in charge of granting federal entitlements to Pemex and establishing energy policy. In parallel to the CNH, the Energy Regulatory Commission, or Comisión Reguladora de Energía (CRE), will be responsible for electricity and for the transportation, storage, and distribution of natural gas, fuels, biodiesel, petrochemicals, LPG (liquefied petroleum gas), LNG (liquefied natural gas), and the sale of gasoline and other fuels to the public. Two new commissioners have been appointed to this agency, as well. The Centro Nacional de Control de Energía (CENACE) will be the programming entity controlling Mexico's electricity system.
The state-owned petroleum company, Petróleos Mexicanos, dates back to 1938 when Mexico nationalized its petroleum industry and all private foreign and domestic energy companies were expropriated. Needless to say, Pemex employees are not accustomed to upstream competition.
But the old Pemex lacked the experience, technology, and financial resources to explore in deep water or shale, while existing oilfields were going into decline and reserves were diminishing. The need for drastic reform was apparent to everyone in the industry if Mexico was to continue to benefit from oil and gas income. The new Pemex has a new board of directors with no union members. It will also be revamped into two divisions, upstream and downstream, with more independence from the government than in the past.
The technical arm of Pemex is the Mexican Petroleum Institute, or Instituto Mexicano del Petróleo (IMP). This organization also will be reorganized and updated. Petróleos Mexicanos Internacional (PMI) is the Pemex affiliate that markets crude oil and fuels to the rest of the world.
The National Center for Natural Gas Control (Cenagas) will govern the administration and operation of the National Transportation and Storage Integrated System, which owns the natural gas pipelines used by Pemex Gas y Petroquimica Básica (PGPB), the Pemex subsidiary that processes, transports, and commercializes natural gas, liquid hydrocarbons, and petrochemical products like ethane, sulfur, and liquid petroleum gases (LPGs).
And one more entity should be mentioned: the SENER Conacyt Fund will be the investment vehicle by which the Mexican government can participate in exploration and production projects in Mexico. Pemex must have at least a 20% interest in any projects that may involve trans-national boundary fields.
Perhaps more important than the proliferation of agencies, each with a highly defined mission, have been the antitrust and financial reforms and the new anticorruption laws mandating transparency. For instance, under the reform laws, CRE and CNH commissioners will not be allowed to have one-on-one meetings outside the office with representatives of regulated companies or their agents. All meetings will take place at commission offices. At least two commissioners must be present, and minutes must be taken and made available to the public.
What is provided here is, of course, just a primer to acquaint US investors and operators with the array of new and revised agencies that must be explored and thoroughly understood in order for any new operation in Mexico to be successful. Mexico has established a new legal and organizational structure that can provide foreign investors with a reliable environment for "prospecting" and "prospering."
A new legal structure is in place, but the real test will be how it functions in practice. It is at this important juncture that experienced lawyers, legislators, and government officials will play key roles in implementing Mexican energy reform and assisting foreign investors with Mexican energy business ventures.
About the author
Nicolas Borda is a shareholder with Greenberg Traurig LLP and is a business lawyer licensed in Mexico and New York who focuses on Mexican and energy cross-border transactions, regulatory aspects, government procurement, public policy, infrastructure, real estate, and dispute resolution in the energy sector.
