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Legal Update

Mexico’s Hydrocarbons Revenues Law Could See Changes with Bill

1 June 2018
Mayer Brown Legal Update

Last month, Senator Dolores Padierna Luna of the Workers’ Party (PT)—part of the Morena coalition that supports left-leaning presidential candidate Andrés Manuel López Obrador—submitted a bill to the Mexican Senate proposing to amend the current Hydrocarbons Revenues Law. Initiatives such as this bill are to be expected in the near future from the parties opposing the recent petroleum industry reforms in Mexico. 

Among the most relevant changes proposed by the bill are:

  • A signature bonus for E&P contracts would be applicable for all types of contracts and adhere to a minimum of 5 percent of expected value of hydrocarbons to be produced in the area;

  • The Ministry of Finance (SHCP) would establish tie-breaking procedures and award criteria for bidding processes;

  • The SHCP would have the power to determine the contractual value of all hydrocarbons, which is currently determined by the National Hydrocarbons Commission (CNH) and its contractors. Such contractual value would be determined at the wellhead and include oil used for production and flaring and wasted on spillage; 

  • A Pemex affiliate would be appointed as marketer of the hydrocarbons and thus receive royalties for such commercialization, virtually ending the possibility of private sector presence in this activity;

  • State consideration in E&P contracts would have to adhere to a minimum of 50 percent of the contractual value of hydrocarbons;

  • Base royalties for non-associated natural gas would kick in at $2USD/MMBTU;

  • Royalties in license contracts would be made in kind, as opposed to the current situation in which the royalties are paid in cash;

  • Recovery costs on the production sharing agreement would be reduced to 40 percent from the current 45–85-percent range, and shallow water contracts would no longer have the current cost recovery incentive;

  • The SHCP would determine the adjustment mechanism methodology by law. Such adjustment mechanism would no longer be established in each E&P contract, under parameters determined by the SHCP itself;

  • Income tax would be levied by contract—jointly on the members of a consortium, instead of individually, which would prevent tax consolidation on contracts signed by the same company; and

  • The bill would open up the possibility of new types of E&P contracts. (Although this is not explained very clearly.) It would also open up the possibility for the states to create new taxes on petroleum activities. 

In broader terms, the bill aims to install stronger government control over the revenues from the upstream sector and weaken the roles of the CNH and the Mexican Petroleum Fund (FMP). Consequently, along with the upcoming July 1 presidential elections, this bill’s progress through the Senate should be followed closely. 

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