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Legal Update

Mexico’s Contemplated Energy Reform May Allow Profit-Sharing Arrangements and Booking of Reserves for Development of Deep-Water and Shale Resources

20 June 2013
Mayer Brown Legal Update

President Enrique Peña Nieto recently announced he will send a “transformational” energy reform bill to Mexico’s Congress in the coming months in an effort to attract the private capital and expertise required to develop Mexico’s deep-water and shale deposits and reverse the country’s declining energy production.

According to statements of top government officials, the bill could propose constitutional amendments that would allow private companies to participate in profit-sharing arrangements and joint ventures with Pemex, Mexico’s state-owned oil company, and book hydrocarbon reserves. The bill is likely to focus on, and may be limited to, the development of Mexico’s deep-water and shale gas deposits, where most of the country’s untapped oil reserves are believed to lie and where Mexico lacks the expertise required for extraction. The US Energy Information Administration estimates Mexico has the world’s 6th largest technically recoverable shale gas resources. Other onshore and shallow-water reserves, where Pemex has expertise and lower costs, are likely to remain under the current regime.

Although no proposal has been published, recent statements from top government officials and ruling party leaders, reported in The Wall Street Journal on June 18, offer a first glimpse of key elements the energy reform bill could contain:

  • Permission for private companies to participate in profit-sharing arrangements and joint ventures with Pemex
  • Freedom for private companies to book hydrocarbon reserves
  • No in-kind compensation, but cash for oil at market prices
  • 25-year contracts for designated deep-water and shale areas
  • Creation of a national petroleum agency
  • Permission for private companies to participate in downstream activities, such as oil refining (this is expected to be a less contentious matter of the reform provisions)
  • Changes to Pemex’s administrative structure that would allow the company more financial and operational freedom and other measures to modernize the company

Such a bill is likely to face strong opposition from some groups, but President Peña Nieto’s administration appears confident that the so-called Pact for Mexico (Pacto por Mexico) among the country’s three major political parties—the PRI, PAN and PRD—will ensure passage of the energy bill by year’s end.

Only six months into his term, President Peña Nieto has managed to push through two major constitutional reforms in the telecommunications and education sectors, has proposed a comprehensive financial reform, and is expected soon to propose both energy and fiscal reforms, all of which were agreed upon in the Pact for Mexico.

Passage of a constitutional amendment in Mexico requires a two-thirds majority in both houses of Congress and an affirmative vote of a majority of the state legislatures. The PRI holds slightly less than 50 percent of the seats in both federal houses and would need the cooperation of one of the two other major political parties—the PAN and the PRD—to pass a constitutional amendment. The PAN is expected to support the energy reform bill. Thus, even without the support of the PRD, which has traditionally opposed energy reform, the PRI and PAN would have the required votes to pass the constitutional amendments for energy reform—though, politically, and pursuant to the Pact for Mexico, a consensus between the three parties would be required.

President Peña Nieto is expected to present his energy reform proposal before Congress begins its second regular session on September 1. Meanwhile, Congress is making preparations to address the proposal. Congressional leaders of Mexico’s main political parties have agreed to hold two special sessions during the summer to tackle outstanding initiatives so that they can focus on the energy and fiscal reforms in September.

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  • Jose L. Valera
    T +1 713 238 2692
  • Pablo C. Ferrante
    T +1 713 238 2662

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