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Energy Reform falls short

On November 28 2008, a legislative package referred to as the Energy Reform was enacted. Its primary purpose, as stated by the debates in Congress, is to strengthen the Mexican oil industry, headed by Petróleos Mexicanos (Pemex), a decentralised Mexican entity, and allow the industry to continue being a driver of the development of Mexico. The Energy Reform also includes attempts to regulate and promote the use of renewable energies.

The subject of Energy Reform has been widely debated in Mexico in recent years. It is fair to say that the resulting Energy Reform is the product of a highly charged and politicised process. However, contrary to initial expectations, consensus was reached in Congress. Calls made by Mexico's centre-left group to prevent privatisation of the state-controlled oil industry were strongly voiced and ultimately resulted in a reform that does not contemplate certain aspects initially proposed by the administration of President Calderón, such as opening certain activities to greater participation from private investors, and focuses more on administrative aspects of Pemex and on what is expected to be a new regime for renewable energies.

All activities relating to exploration, the production and refining of oil, other hydrocarbons and basic petrochemicals continue to be regulated activities that only Pemex, directly or through its subsidiary entities, may engage in directly. The newly enacted Ley de Petróleos Mexicanos (Law of Pemex) incorporates a special regime applicable to Pemex in connection with the corporate governance of Pemex, the financing and budget of that entity and the procurement of services and works from third parties. This new regime is intended to provide Pemex with enhanced flexibility in the performance of its objectives as stated by the law and to enhance accountability within Pemex and its subsidiary entities.

The Law of Pemex enacted new provisions that regulate the composition of the board of directors of Pemex and its subsidiary entities without ceding state control. Such provisions focus on setting out eligibility criteria based on professional experience regarding the appointment of individuals to such boards. The decision-making process in Pemex has also been revised: a number of committees have been created in an attempt to ensure greater transparency within Pemex and its subsidiary entities.

Under the new provisions, the procurement of works and services in connection with the substantive and productive activities of Pemex will adhere to the provisions set forth in the Law of Pemex and not the general procurement laws of Mexico. The legal provisions still require that Pemex directs exploration activities carried out by its contractors. As a result, the risk (and associated costs) connected to the exploration and development of new fields has been retained by Pemex. However, contractors may be entitled to receive additional compensation if Pemex: (i) obtains savings by virtue of a reduction in the completion of works; (ii) becomes the owner or is benefited by new technologies provided by the contractor; or (iii) obtains higher profits and a better result from works or services as a result of circumstances attributable to the contractor, provided that the contractors will in no event be entitled to receive percentages on the value of sales or on the production of hydrocarbons. These additional compensations will be set forth expressly upon execution of the relevant contracts.

The Energy Reform also includes a new law pursuant to which the Comisión Nacional de Hidrocarburos is created in an attempt to regulate and supervise the exploration and production activities of Pemex. Insofar as Pemex retains the exploration and production monopoly in Mexico, it will remain to be seen whether this additional supervisory entity will serve its purpose of providing efficient checks and balances to the actions of Pemex by representing the interests of the Mexican nation as owner of the oil reserves.

Regarding renewable energies, the Energy Reform includes two newly enacted laws intended to promote the use of renewable energies in Mexico and to provide the sustainable use of all types of energy in Mexico. Both laws are based upon the implementation of broad programmes and strategies by the Federal Government and a few specific tools are provided, such as a fund for the development of renewable energies.

The newly enacted Energy Reform requires the issuance by the Federal Government of a number of regulations expanding on the provisions of the laws and setting forth the specific means for compliance with such laws. The regulations have not been issued to date, and are necessary to implement a significant portion of the Energy Reform, however, they may not contravene or exceed the limits of the laws being regulated.

The effectiveness of the Energy Reform will be better judged once the relevant regulations have been published by the Federal Government and some time has elapsed in order for such new provisions to be implemented, including the appointment of individuals to the newly formed offices provided by the Law of Pemex and their performance of their duties.

Thomas Mueller, Federico Santacruz and Jorge Oria

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