Federal Executive of Mexico Presents Initiative That Issues the Law of the Hydrocarbon Sector: Part 3

Mexico's proposed Hydrocarbons Sector Law (Ley del Sector Hidrocarburos or LESH) contemplates: 1) abrogating the Hydrocarbons Law (in force) published on Aug. 11, 2014, 2) the issuance of the Regulations of the LESH, 3) abrogate the administrative provisions regarding the bidding of contracts for the exploration and extraction of hydrocarbons (CEEs) published on Nov. 28, 2014, in the Official Gazette of the Federation (Diario Oficial de la Federación), 4) leave without effect all the bidding bases for the award of CEEs issued previously and 5) update of the regulations applicable to upstream and midstream activities (while the same are issued, those issued previously will continue in force as long as they do not oppose the content of the law). After a preliminary analysis of the draft law, the following are the primary amendments and additions to the regulatory framework:

1. Object of the law: In addition to those already established, the law adds within the activities to be regulated, the following:

a. import and export of oil and natural gas

b. formulation, import and export of petroleum products

c. the import, export and commercialization of petrochemicals, as well as the transportation and storage thereof, regardless of their connection to pipelines

2. New concepts or modifications: In addition to what has already been stated above, the LESH incorporates the following concepts:

a. Area in possession of the State: means areas determined by the Secretary of Energy (Secretaría de Energía or SENER), in which no hydrocarbon exploration and extraction activities are carried out, and which are not granted to Mexican Petroleum (Petroleos Mexicanos or PEMEX) or to any contractor.

b. Assignment: (modification) means the legal act by which SENER grants PEMEX the right to carry out hydrocarbon exploration and extraction activities in the assigned area and are classified as: 1) assignment for own development and 2) assignment for mixed development.

c. Assignment for mixed development: means the legal act by which SENER exclusively grants PEMEX the right to carry out hydrocarbon exploration and extraction activities, and PEMEX complements its technical, operative, financial or execution capacities with the support of "participants".

d. Assignment for own development: means the legal act by which SENER exclusively grants PEMEX the rights to carry out hydrocarbon exploration and extraction activities, which it will carry out with its own capacities.

e. Formulation: means the activity that consists of blending petroleum products with additives and biofuels to obtain products that comply with the quality specifications established in the applicable regulation that determines it.

f. Manifestation of social impact of the energy sector: is the document that, based on studies, describes the significant and potential social impact of a work or activity in a community.

g. Petroleum operator: is the person responsible for carrying out all activities, works and administrative procedures in assignments or CEEs.

h. Participant: means the legal entity that complements the technical, operational, execution or financial capacities of PEMEX, in the exploration and extraction activities, through the allocation for mixed development.

i. Social witness: means the individual registered as such with the SENER.

3. Allocations and priority of allocations: The SENER will grant the assignments to PEMEX, in either of the two modalities — "own development" or "mixed development" — with that same order of priority. PEMEX, prior authorization of its board of directors, may indicate no interest or capacity for such assignments on an exceptional basis, and CEEs may be granted.

4. Binding planning: The regulation of the activities subject to the LESH must be subject to the National Development Plan, subsequent plans, the Energy Planning and Transition Law and Public Policy, through SENER.

5. Issuance of regulation: SENER and the National Energy Commission (Comisión Nacional de Energía or CNE) shall exercise their powers to issue regulation and grant authorizations, approvals and permits under binding planning criteria.

6. Allocations for Proprietary Development

a. Granting: SENER may grant or modify the Allocations for Proprietary Development (Asignaciones para Desarrollo Propio or ADP), determine the area in possession of the state to be allocated, determine technical and operational terms, and technically manage and supervise the compliance of the same, among others.

b. Characteristics of the title: Included among the elements of the assignment title are: 1) the resignation of the assignment area and the grounds for revocation, 2) the conditions for the unification of assignment areas or contract areas and 3) the remaining obligations of the assignee, in the event of return or resignation.

c. Change of modality: In the event that PEMEX determines the need to complement its technical, operational, execution or financial capacities, may request SENER to change the modality to assignment for mixed development.

7. Mixed Development Allocations

a. In these mixed development assignments (asignaciones para desarrollo mixto or ADMs), any party may serve as a petroleum operator.

b. In ADMs, PEMEX maintains the exclusive right to the assignment, and may not transfer, assign or grant this right to third parties for any reason. Likewise, in these allocations, PEMEX must not make economic contributions.

c. PEMEX must maintain a percentage participation interest in the mixed contracts of no less than 40 percent.

d. When the assignee decides not to continue with the hydrocarbon exploration or extraction work, it may waive the ADM, under the terms determined for such purpose.

8. Exploration and extraction contracts: The SENER may enter into CEEs, for which purpose it must issue the guidelines that regulate its bidding procedure. The guidelines issued for such purpose by the Secretary of Finance and Public Credit (Secretaría de Hacienda y Crédito Público or SHCP), within the scope of its competence, must be observed.

Once the CDE has been signed, no modifications may be made regarding prequalification criteria, economic conditions or contractual area, and essential elements may not be established in the bidding conditions. In the case of non-tendered contracts, no modifications may be made to the economic conditions or contractual area.

9. Migration of ADP to CEE: PEMEX may request SENER to migrate ADP to CEE, for which, once SENER's approval is obtained, the SHCP may determine the economic conditions and fiscal terms of such migration, according to the provisions of the Hydrocarbons Revenue Law.

a. Restructuring of SENER and CNE powers: With the elimination of the National Hydrocarbons Commission, the powers and functions are restructured mainly as follows:

10. Joint and several liability for importation: Import permit holders shall be jointly and severally liable — in fiscal matters — for the other regulated activities associated with importation.

11. Quality specifications and verification: The quality specifications of hydrocarbons, petroleum and petrochemicals will be reviewed in accordance with the official Mexican standards issued by SENER. The CNE will be responsible for verifying and monitoring compliance with such specifications.

12. Manifestation of social impact of the energy sector: Persons interested in obtaining a permit or authorization to develop hydrocarbon projects, as well as assignees and contractors must include in the request for authorization, the public version of the Manifestation of Social Impact of the Energy Sector (Manifestation).

SENER must issue the authorization to the Manifestation, in a term no longer than 90 working days. The authorization of the Manifestation must remain enforced during the life of the project.

13. Substantial increase in fines and penalties established in the law: In general terms, the law establishes substantial increases in the penalties that the SENER, SHCP, the Secretary of Economy and the CNH may impose for violations of the law. Such penalties increased in some cases by up to one hundred percent of the amounts originally established in the Hydrocarbons Law.

Transitory Articles

• Effective: The day after its publication in the Official Gazette of the Federation.
• Abrogated provisions: Abrogates the Hydrocarbons Law, the administrative provisions on bidding for contracts for the exploration and extraction of hydrocarbons (published in the Official Gazette of the Federation on Nov. 28, 2014) and leaves without effect all the bidding conditions for the award of CEEs issued previously.
• Regulations to the LESH: Contemplates the issuance of the regulations to the LESH, by the head of the federal executive, within 180 calendar days following its entry into force. The regulations of the Hydrocarbons Law will continue to be in force to the extent they do not oppose the LESH.
• First-hand sales: The SENER and the CNE, within the following 180 calendar days, shall repeal the regulation applicable to first-hand sales and those asymmetric regulations and establish the obligations for the presentation of the respective information. The first-hand sales contracts entered into by PEMEX and its subsidiaries must be converted into marketing contracts within 180 calendar days.
• Social impact analysis: (evaluación de impacto social or EVIS): The social impact assessment will continue to be in force until the general administrative provisions corresponding to the social impact statement of the energy are issued.
• Previous assignments or CEE: The assignments and CEE of hydrocarbons that were granted or entered into prior to the entry into force of the LESH will remain in force under the terms and conditions under which they were granted.
• Modifications to the existing CEE: Notwithstanding the foregoing, it is established that SENER has a term of 180 calendar days, as from the entry into force of the LESH, to enter into the amending agreements with respect to the CEE entered in alliance or individually by PEMEX Exploration and Production (PEP), derived from the modification of Mexican Petroleum to State Public Company.
• Access to the platform of the National Hydrocarbons Information Center: The agreements for access to information that have been signed shall remain in force, under the agreed terms.
• Requests for permits and administration of previous contracts: Those requests for authorization, approval or permits that were submitted prior to the entry into force of the LESH, will be resolved in accordance with the legal provisions applicable at the time of the request. The same applies with respect to the administration of allocations and CEEs, with respect to approval processes, notices and reports.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.