Member Article

According to the Mexican Constitution (the "Constitution"), the Nation has direct ownership of subsoil, as well as the exclusive right to develop and use petroleum and gas. Therefore, private ownership of hydrocarbons is forbidden and ownership of reserves of petroleum and gas belongs to the Nation.As a result, the Nation may not grant oil exploration and user rights to private entities. Similarly, all hydrocarbons and basic petrochemicals are deemed to be strategic, exclusively reserved to the Nation.

The oil industry includes among others: (1) the exploration, use, refining, transportation, storage, distribution, and first hand sale of oil and products obtained from its refining; (2) the exploration, use, production, and first hand sales of gas, as well as its transportation and storage, and (3) the production, transportation, storage, distribution, and first hand sales of products derived from oil and gas.

Currently, Petroleos Mexicanos ("PEMEX"), a federal governmental agency, and its subsidiaries have the exclusive right to carry out all aspects of the oil and gas industry in Mexico, excluding the storage, transportation, distribution, and operation of natural gas pipelines, as well as the transportation, distribution, storage and sale of liquefied petroleum gas. PEMEX's current structure is composed of five divisions: (1) PEMEX-Exploration and Production, in charge of the exploration and production of oil and natural gas; (2) PEMEX-Refining, which refines crude oil into gasoline, diesel and liquefied petroleum gas; (3) PEMEX-Gas and Basic Petrochemicals, in charge of processing, transporting, distributing and marketing of natural and liquefied petroleum gas; (4) PEMEX-Petrochemical, is in charge of the production and marketing of basic petrochemicals; and (5) PEMEX-International Trade, which buys, sells and trades oil, refined products and petrochemicals.

Private companies and individuals may hold one or more authorizations for the storage, supply and sale in gas stations of liquefied petroleum gas. Liquefied petroleum gas is exclusively produced by PEMEX. The distribution and sale may be carried out through a PEMEX branch, by individuals, private companies or through services agreements made with such persons, provided prior authorization is given by the Ministry of Economy.

The petrochemical industry is divided into basic and secondary petrochemical industries. Ownership, production, and use of the basic petrochemical industry or products are exclusively reserved to the Nation, exclusively by PEMEX. The secondary petrochemical industry is not considered part of the strategic areas established as such in the Mexican Constitution and, therefore, the private sector, including foreign investors, may operate in this area.

Recent Amendments to Laws in the Energy Sector

After a review by Congress of several legislative proposals made by the President and several political parties to amend and enact new laws dealing with the energy sector, on November 28, 2008, energy reforms were published in the Federal Official Gazette and entered into force on November 29, 2008. The constant low level of oil extraction and production, as well as decreasing market prices, contributed to motivating Congress to approve the series of legislative proposals that will give PEMEX tools to be more efficient.

The energy reforms are intended to modernize and improve the gas, oil, and bio-energy industries in Mexico, allowing greater participation by the private sector as contractors or service providers, and strengthening the organization and operation of PEMEX.

The amendments and new laws may be summarized as follows:

• Amendments to Several Articles of the Law Regulating Article 27 of the Constitution with Respect to Petroleum.
• Amendments to Article 33 of the Federal Public Administration Organizational Law, granting additional authority to the Department of Energy to establish and manage energy policies.
• Passing of the National Hydrocarbons Commission Law which contemplates the creation of such a commission with the technical capacity to regulate and supervise the exploration and extraction of hydrocarbons.
• Amendments to Several Articles of the Law that Establishes the Energy Regulatory Commission, providing it with greater authority and technical, operational, managing, and decision-making independence.
• Passing of the Sustainable Use of Energy Law to seek to optimize the careful use of energy, from production to consumption.
• Finally, Passing the Mexican Petroleum Law which will regulate the organization and the operation of PEMEX. This Law will control the contractual involvement of PEMEX with private companies interested in taking part in the hydrocarbon sector. In addition, the Mexican Petroleum Law is supposed to strengthen the PEMEX Board of Directors by giving it full authority to conduct PEMEX’s business and allowing the participation of independent directors and the hiring of private contractors through a more simple and expedited process, different from that applicable to all other government entities. One of the most relevant aspects of the reform is that PEMEX will be allowed to agree on variable compensations to be paid to private contractors that may apply mainly when the service is performed before schedule and when new technologies are given to PEMEX as a result of the rendering of the service.

The new Board of Directors is composed of 15 members, six appointed by the President, five members appointed by the Oil Workers Union, and four professional members nominated by the President and approved by the Senate. To strengthen the operation of the Board of Directors, this new law also establishes mainly the following committees: (i) Evaluation of Development; (ii) Investments and Strategy; and (iii) Acquisitions, Leases, Works, and Services.

Notwithstanding the foregoing and although the energy reforms give PEMEX more autonomy, new regulations, manuals and commissions will have to be created to complement the energy reforms. It will not be possible to truly know their reach and benefits for at least one to two years.

The reforms were not what the business community expected and do not solve the problems and challenges Mexico is facing when it comes to the oil and gas sector. For instance, the proposal made by the President allowed private investors to take part in refining and in the transportation and warehousing of gas, oil refined products and basic petrochemicals, but this was not passed by Congress. Nevertheless, some in the industry are eagerly looking forward to knowing the details of the regulations and manuals to be issued by PEMEX, especially those dealing with the variable compensation schemes to be applied. Mexico has a strong challenge to make this scheme attractive to private contractors in order to bring into the country the resources and technology (especially when it comes to deep water drilling) that is required in order to develop the industry.