This reform may lead to the opening of the markets, and Mexico appears poised to become a competitive and attractive investment destination in the global energy landscape.

Following the historic constitutional energy reforms the Mexican Congress passed in December 2013—which we reported on in a prior Duane Morris Alert—Mexican President Enrique Peña Nieto submitted on April 30, 2014, for approval of the Mexican Congress, the secondary legislation (the "Legislation") that would implement these reforms, overhauling the Mexican oil and natural gas, petrochemical and power generation industries. Committees of the Senate and House of Representatives are currently debating the Legislation, with final passage anticipated by the end of June. The Legislation includes nine new laws and amendments to several current laws that should outline how the revolutionary energy reforms approved last December will be implemented.

In essence, Mexico proposes to permit both Mexican and non-Mexican investors into the exploration, production and transportation of oil and gas, as well as into the refining and marketing of hydrocarbons. This would end the exclusive rights to Mexican hydrocarbons once held by PEMEX, the state-controlled oil company. A new set of autonomous, independently funded regulators would be created for licensing, safety and environmental protection in the hydrocarbons sector.

Mexico would require measures of transparency unmatched in the hemisphere. This would include public access to contracts, disaggregation and disclosure of revenue sources and open accounting of its national petroleum fund.

These changes are enshrined by changes to three articles of the Mexican Constitution and approved by the Mexican Senate. Essentially, the reform is the core of the government's plan to boost economic growth and to strengthen the domestic oil and gas industries. The energy reform represents a landmark in Mexico's energy policy and provides a first step for encouraging private investment. The scale of this reform appears breathtaking in its scope and ambition. The energy reform provides for mechanisms in which investors may be able to participate in the exploration and production of the hydrocarbons.

This reform is likely to be dynamic in that it may generate large and valuable opportunities for domestic and foreign companies. In particular, international private oil companies may be interested in forming joint ventures with PEMEX. Investment opportunities could emerge across the value chain in the energy sector, including: oil production, construction and management of new refineries, creating new pipeline capacity, building new gas storage and transport facilities and revamping the gas station sector.

Highlights of the Secondary Legislation

Private Participation in Oil and Gas

• Participation and competition between PEMEX and private companies in upstream and midstream activities.
• The opening of the retail fuels sector.

Exploration & Production

• Exploration and production contracts would be awarded through public bids by the National Hydrocarbons Commission (NHC).
• NHC would execute exploration and production contracts with PEMEX, other State Productive Companies or private-sector companies (domestic companies that may be 100-percent foreign-owned).
• PEMEX may enter into joint venture agreements or joint operating agreements with the private sector.
• The Ministry of Energy may determine the participation of PEMEX or other State Productive Companies in certain exploration and production contracts up to 30 percent when it considers that such entities will receive an aggregate value in technology and experience from the private sector or when such projects are supported by specialized financing vehicles of the Mexican government.

Exploration & Production Contract Payment and Compensation

• In connection with "production sharing" contracts and "profit sharing" contracts, generally private contractors would pay an exploration stage fee, royalties and a payment of a percentage over the operating profit.
• In "license contracts," private contractors generally would pay an exploration stage fee, royalties, a signing bonus and a percentage over the operating profit or the contractual value of the hydrocarbons.
• The specifics of each payment and compensation scheme would vary on a case-by-case basis for each contract, including production payments, net profit arrangements, cost recovery and sliding scales.

Three facts clarify the untapped opportunities in Mexico:

1. Mexico sits atop some of the world's biggest oil and gas resources, with a total estimate of 450 billion barrels of oil equivalent. This is comparable to the resource base of Saudi Arabia. Further, Mexico's offshore fields in the Gulf of Mexico also rank amongst the world's most accessible, while its shale fields are in the global top six;
2. Mexico currently operates fewer than 5 percent of the total number of offshore rigs in the Gulf of Mexico; and
3. To date, only several dozen wells have been drilled into Mexico's shale formations, compared to the U.S. shale where more than 40,000 wells were drilled last year.

Politically, President Peña Nieto and Mexico's Congress are backing foreign investment and participation in the country's hydrocarbon business, which has long been a symbol of Mexican nationalism. Mexico's Congress appears to be on schedule to soon produce the detailed legislation called for by the constitutional amendment, and the speed of political progress thus far may be viewed as encouraging. Mexico's government projects that the new reform will boost production to at least three million barrels per day by 2024. Mexico's policymakers appear to have set in motion the framework required to unleash Mexico's 21st-century energy revolution, especially in light of the International Energy Agency's forecast that world purchases of oil and gas will grow by a cumulative $30 trillion over the coming two decades.

This reform may lead to the opening of the markets, and Mexico appears poised to become a competitive and attractive investment destination in the global energy landscape.

For Further Information

If you have any questions about this Alert, please contact Eduardo Ramos-Gómez, Rosa M. Ertze, any of the attorneys in our Mexico Business Group, any of the attorneys in our Energy Practice Group or the attorney in the firm with whom you are regularly in contact.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.