The Draft Decree confirms the transformation of Petróleos Mexicanos (“PEMEX”) into a State Public Enterprise, thereby establishing a new regulatory framework in which governmental intervention in the planning and operation of the hydrocarbons sector will prevail. Below is an executive summary of the secondary legislation bills concerning hydrocarbons, highlighting the most relevant points: A. Hydrocarbons Sector Law The LSH seeks to focus –primarily- on the public sector and its exclusive strategic areas in order to grant a benefit to PEMEX in hydrocarbons activities. With respect to private participation in hydrocarbons activities, new schemes are established that allow private participation but seek to grant priority to PEMEX’s activities. In addition, the LSH repeals the Hydrocarbons Law of August 11, 2014. The most relevant modifications proposed in the LSH are detailed below: • Elimination of the National Hydrocarbons Commission and the Energy Regulatory Commission: The Ministry of Energy (“SENER”), through the National Energy Commission (the “CNE”), will now be responsible for issuing and enforcing compliance with technical regulation in hydrocarbons matters. • Permits for Hydrocarbons Activities The LSH establishes regulatory changes regarding permits for hydrocarbons activities: - SENER will be responsible for issuing permits for the activities of (i) import, export, storage, and transport of petroleum, and (ii) import and export of natural gas, petroleum products, and petrochemicals. - The CNE will be responsible for permits for: (i) processing, transport, storage, distribution, marketing, and retail sale of natural gas; (ii) formulation, transport, storage, distribution, marketing, and retail sale of petroleum products; (iii) transport, storage, and marketing of petrochemicals; and (iv) the management of Integrated Systems. It is established that import permit holders will be jointly and severally liable in tax matters with respect to the other regulated activities associated with the import. • Assignments for Hydrocarbons Exploration and Extraction Activities The LSH contemplates the following schemes for granting assignments for the exploration and extraction of hydrocarbons: i. Own Development, assignments granted for PEMEX’s exclusive use; ii. Mixed Development, assignments in which PEMEX requests private-sector participation to complement its technical, operational, and financial capabilities for hydrocarbons exploration and extraction activities; and iii. Contracts for the Exploration and Extraction of Hydrocarbons, on an exceptional basis, when PEMEX has no interest or capacity to develop an assignment, the LSH allows public tenders to be held for contracts for the exploration and extraction of hydrocarbons so that the private sector may carry out exploration and extraction activities. • Award of Exploration and Extraction Contracts SENER will be the sole authority empowered to grant exploration and extraction contracts, through public tenders, and will establish the corresponding contracting model, including service, profit, shared-production, or license contracts. PEMEX and its affiliated companies may enter into alliances, mixed-development schemes, or associations with the private sector and participate jointly in public tenders. • Priority to PEMEX in Integrated Systems Under the LSH, it is contemplated that within the Integrated Systems (e.g., transport and storage) priority must be given to the allocation of the capacity necessary for the activities of the State Public Enterprises (i.e., PEMEX and the Federal Electricity Commission) as a matter of public interest; however, no mention is made as to whether the priority will apply to the available capacity or the reserved capacity of the Integrated Systems. • Open Access Does Not Apply to PEMEX The obligation of permit holders to provide non-unduly discriminatory open access to their facilities and services for the transport and distribution of hydrocarbons, petroleum products, and petrochemicals through pipelines and their storage is maintained, with the exception that such open-access obligation will not apply to the State Public Enterprises or their affiliated companies. • Possible Price Regulation The LSH states that, with respect to the distribution and retail sale of liquefied gas, petroleum, gasoline, and diesel, methodologies may be established to guarantee the well-being of the population and the control of inflation in petroleum products, which could lead to an effort to standardize prices. • Arbitration Disputes related to Exploration and Extraction Contracts will be submitted to arbitration seated in Mexico City. • Social Impact Assessment The Social Impact Assessment changes its name to Social Impact Statement, incorporating additional requirements with a humanistic-rights and social-sustainability approach. Nevertheless, the Social Impact Assessment will remain in force until the issuance of the administrative provisions governing the Social Impact Statement. On the other hand, even where the Final Social Impact Authorization for the development of the project’s infrastructure has been obtained, other authorities could require additional requirements; without the LSH specifying what those requirements would be and/or which authorities could request them, nor at what stage they could be required (whether before or after the start of infrastructure development). • Volumetric Controls The volumetric-control requirements, currently found in administrative provisions, are elevated to statutory rank, and obligations to submit weekly reports on volumetric controls are incorporated. • Transitory Provisions Assignments, contracts for the exploration and extraction of hydrocarbons, authorizations, and permits that were granted prior to the publication of the LSH will remain in force under the terms in which they were granted. Applications for authorization, approval, or permits received prior to the entry into force of the LSH will be processed in accordance with the provisions in effect at the time of their submission. The administrative provisions regarding tenders for Contracts for the Exploration and Extraction of hydrocarbons (published in the Official Gazette of the Federation on November 28, 2014) are repealed, and all tender bases for the award of such contracts issued prior to the entry into force of the LSH are rendered void. Finally, a new regulation to the LSH must be issued within 180 days of the entry into force of the LSH. In the meantime, the regulations of the Hydrocarbons Law will remain in force insofar as they do not contravene the LSH. B. Law of the State Public Enterprise, Petróleos Mexicanos Under this Draft Decree, PEMEX becomes part of the Parastatal Public Administration subject to the PEMEX Law, its regulation and, on a supplementary basis, public, civil, and commercial law will apply to it. Likewise, the Petróleos Mexicanos Law of August 11, 2014, is repealed. • Private Parties’ Rights over Oil Reserves Those persons who enter into acts or contracts with PEMEX (e.g., through Mixed-Development Assignments) will in no case have the right to register oil reserves as their own assets. Although this prohibition was contemplated in the Petróleos Mexicanos Law, the text that allowed private parties to report the economic interest that the act or contract with PEMEX represented for them, as applicable, is eliminated; this was sometimes used by companies with obligations to declare their assets in international financial markets or securities institutions, or to secure financing for exploration and extraction activities; nevertheless, and although such language is eliminated, there is no express prohibition on reporting economic interests. • PEMEX’s Vertical Integration Through the transitory regime of the PEMEX Law, the following are dissolved: Pemex Exploración y Producción, Pemex Transformación Industrial, and Pemex Logística, resulting in a vertical integration of PEMEX, which absorbs all the rights and obligations of the extinguished productive subsidiary companies. • Procurement PEMEX will continue to carry out its procurement, leasing, contracting of services, and works in accordance with Article 134 of the Federal Constitution, subject to the principles of economy, effectiveness, efficiency, impartiality, and integrity, in accordance with the PEMEX Law and the administrative provisions to be issued by PEMEX’s Board of Directors. • Sustainability It is expressly provided that PEMEX and its affiliated companies must contribute to the sustainable development and social well-being of the communities in which they carry out their activities, with full respect for human rights, through corporate social responsibility strategies and community engagement. • Transitory Provisions Contracts, agreements, trusts, concessions, authorizations, and permits granted by the extinguished productive subsidiary companies will be understood to have been granted by PEMEX and will continue to produce their effects, in accordance with the rules under which they were issued and until the end of their term. Likewise, the rules issued by the extinguished productive subsidiary companies will remain in force insofar as they do not conflict with the PEMEX Law, until the competent bodies issue new rules. C. Law of the National Energy Commission Through the new LCNE, the CNE is created as a body sectorized to SENER, whose purpose is to regulate, supervise, and impose sanctions on energy-sector activities, understood as those activities related to the electricity and hydrocarbons sectors whose performance is governed by the LSH, the Electricity Sector Law, and the provisions derived from them. • Main Powers Among the powers established in the LCNE for the CNE, the following stand out: (i) to grant, modify, update, revoke, and extinguish permits, authorizations, and other administrative acts regarding energy-sector activities; (ii) to require third parties that have business relationships with those carrying out energy-sector activities to provide information related to the authorizations and permits issued, contracts, assignments, and agreements relating to such activities; (iii) to summon to appear public servants and private parties that carry out energy-sector activities in order to supervise and monitor compliance with the applicable legal provisions, as well as with the regulation, authorizations, and permits issued in connection with such activities; and (iv) to impose provisional or preventive measures, including the closure and suspension of facilities and activities. • Main Powers in the Hydrocarbons Sector The CNE’s main powers in hydrocarbons matters include the following: (i) to regulate the consideration, prices, and tariffs applicable to sector activities; and (ii) to grant, modify, terminate, and supervise permits for (a) the processing, liquefaction, regasification, compression, decompression, transport, storage, distribution, marketing, and retail sale to the public of natural gas; (b) the formulation, transport, storage, distribution, marketing, and retail sale to the public of petroleum products; and (c) the transport, storage, and marketing of petrochemicals. • Permits and Authorizations Granted by the CRE and CNH The permits, authorizations, and other acts that have been issued by the Energy Regulatory Commission and the National Hydrocarbons Commission continue to produce effects until the end of their term in accordance with the rules under which they were formalized. Nevertheless, the CNE may monitor and supervise their compliance and, as applicable, terminate them early or revoke them. D. Biofuels Law The purpose of the LBIO is to regulate and promote the sustainable development of biofuels, understood as gaseous, liquid, or solid fuels produced from the direct energy use of biomass or obtained from its processing. • New Regulated Activities New regulated activities are established, the performance of which requires a permit granted by the Ministry of Agriculture and Rural Development or SENER, as applicable. In this regard, a permit from SENER will be required for the production, import, export, storage, transport, marketing, distribution, and retail sale to the public of biofuels. • Fiscal and Financial Incentives It is provided that the agencies of the federal public administration may promote and foster fiscal, financial, or market instruments that incentivize (i) the use and recovery of organic waste and the treatment of wastewater for its direct use as biofuels or for their production; (ii) the sustainable production of biomass for its direct use as biofuel or for the production of biofuels; and (iii) the production of biofuels and their sustainable use. It is important to note that, as of the date of publication of this document, the Draft Decree is still subject to the corresponding legislative process, and it may therefore be subject to additional changes and adjustments. For further information, contact Edmond Frederic Grieger, Partner +52 (55) 5258-1048 | egrieger@vwys.com.mx Alberto Córdoba, Partner +52 (55) 5258-1016 | acordoba@vwys.com.mx Ariel Garfio, Partner +52 (55) 5258-1007 | agarfio@vwys.com.mx
