- 1.What is the legislation applicable to oil and gas activities in your country? Is it federal or state legislation, or both?
Oil and gas activities in Mexico are subject to federal legislation. The most relevant statutes are:
- the Mexican Federal Constitution, namely articles 25, 27 and 28;
- the Regulatory Statute of article 27 of the Mexican Federal Constitution Regarding Petroleum (the Oil and Gas Act);
- the Natural Gas Statutory Law
- the Liquefied Petroleum Gas Statutory Law
- the PEMEX Act;
- the Statutory Mining Law on Carbon Associated Gas
- the Energy Regulatory Commission Act;
- the Hydrocarbons National Commission Act;
- the Public Works and Related Services Act;
- the Public Acquisitions, Leases and Services Act; and
- the Foreign Investment Act.
- 2.Are oil and gas activities carried out by the state or a state-owned agency or national oil company (NOC)?
Yes. Oil and gas activities in Mexico are carried out by a state-owned company called PEMEX, which operates through five subsidiaries: PEMEX Exploration and Production, PEMEX Gas and Basic Petrochemical, PEMEX Refining, PEMEX Petrochemical and PMI International Trading.
Under Mexican law, most oil and gas activities in Mexico, excluding the gas associated to carbon fields, are considered to be part of the Mexican oil industry and can only be carried out by the Mexican nation through PEMEX and its subsidiaries. Private entities may only engage in oil and gas-related activities that are not considered to be part of the Mexican oil industry, such as transportation, storage, distribution and the resale of gas and production of secondary petrochemicals (ammonia, benzene, dichlorethane, ethylene, methanol, ethylene oxide, paraxylene, propylene, toluene, xylenes and others). Also, recovery and exploitation of gas associated to carbon fields for its sale to PEMEX or for self-supply purposes, may be executed by private entities in accordance with mining law.
Under Mexican law, the following activities can only be carried out by PEMEX: oil and gas exploration and production activities in national territory; refining activities from national hydrocarbons; and production of basic petrochemicals (ethane, pentane, propane, butane, naftas and raw material for carbon black, hexanes, heptanes and methane).
Nonetheless, in order to better conduct these activities, PEMEX is permitted to engage the services of private entities by entering into public works or services contracts with them. To such end, regarding services provided by contractors to PEMEX, on 6 January 2010 PEMEX released and published the Administrative Guidelines for the Contracting of Works, Leases, Services and Acquisitions of PEMEX’s Productive Activities (Guidelines), which provides a better and more flexible legal procurement framework in connection with PEMEX’s core activities as defined in articles 3 and 4 of the Oil and Gas Act, which include:
- execution of works and services related to the exploration and development of oil and natural gas fields;
- exploration contracts for the search, localisation and delimitation of commercially feasible fields;
- field development contracts for the services of extraction of hydrocarbons, including primary, secondary or tertiary exploitation;
- exploration and production contracts for services related to exploration, exploitation and development of hydrocarbons; and
- any other contract necessary for PEMEX to fulfill its social purpose.
The guidelines now allows PEMEX to engage private entities as contractors or service providers for core activities and serve as a legal bypass to the general procurement laws, which in the past have prevented PEMEX from partnering or engaging the private sector. The structuring, negotiation and execution of the resulting contracts will need to comply with the follow principles:
- the control and administration of the industry is held by PEMEX;
- neither share production nor associations for the execution of activities considered as strategic may be agreed; and
- oil shall never be used as compensation within the contracts
- 3.Is oil and gas a regulated business that can only be carried out by companies that are licensed or that receive government concessions to operate?
Yes. PEMEX is the sole producer of crude oil, natural gas and refined products in Mexico, and also performs oil and gas transportation, storage and distribution, as well as the initial sale of such products to the market. These are regulated activities and, in general terms, upstream activities are regulated by the Hydrocarbons National Commission or by the Energy Ministry, and downstream activities are regulated by the Energy Regulatory Commission.
Private entities may engage in gas transportation, storage or distribution activities subject to obtaining a permit granted by the Energy Regulatory Commission.
- 4.What are the regulatory agencies charged with regulating oil and gas activities?
The main governmental agencies that regulate oil and gas activities in Mexico are the newly created Hydrocarbons National Commission and the Energy Regulatory Commission, though many regulatory powers are still exercised directly by the Energy Ministry. In addition, to a certain extent, PEMEX continues to be a self-regulated entity.
The Energy Reform passed two years ago has clearly strengthened the regulatory regime for oil and gas activities in Mexico by creating a new regulatory agency, namely, the Hydrocarbons National Commission, granting additional regulatory authority and powers to the existing Energy Regulatory Commission and restructuring the faculties of the board of directors.
- 5.Are all hydrocarbons in your country deemed to be originally owned by the state? If so, when does ownership transfer to the extractor or buyer of the hydrocarbon?
Yes. The Mexican Federal Constitution states that every piece of land and body of water located within national territory is originally owned by the state, which has the right to transfer its ownership to individuals, constituting private property. The Mexican state has direct, inalienable and unforfeitable ownership of hydrogen carbons, including those in an intermediate state. It specifically maintains that the Mexican state has ownership over all natural resources on the continental platform and the underwater basement of islands and all the minerals or substances that constitute deposits of a different nature than the components of the land, such as petroleum and all hydrocarbons. In no case, ownership over hydrocarbon resources may be transferred to extractor or buyer. In every case, compensations in multiple services contracts shall be in monetary funds.
- 6.How are oil and gas exploration rights or concessions granted? Is there more than one method for granting such rights (ie, concession and joint exploration agreements) or co-existing regimes applicable to different exploration or exploitation areas?
Under Mexican law, oil and gas exploration rights can only be granted to PEMEX. The granting authority is the Mexican president, who acts through the Energy Ministry.
The award of oil and gas exploration rights or concessions to private entities is expressly prohibited by the Mexican
Federal Constitution.
- 7.Is there a public bidding or similar process? If so, is it open to foreign investors?
This question is not applicable, since oil and gas exploration rights or concessions can only be granted to PEMEX.
- 8.Are there any minimum local content requirements related to international bidding processes?
Yes. Minimum local contents requirement are applicable in bidding processes in terms of Mexican legislation and international treaties (public procurement). The percentage is generally determined on a case-by-case basis.
- 9.Are there any restrictions on foreign participation in such rights or concessions or in companies holding any such rights?
This question is not applicable, since oil and gas exploration rights or concessions can only be granted to PEMEX.
- 10.Are there any restrictions on the participation in such rights or concessions by local national oil companies?
This question is not applicable, since oil and gas exploration rights or concessions can only be granted to PEMEX.
- 11.Are companies or consortia that are awarded exploration rights given priority to operate and exploit the fields? How is priority structured and documented?
This question is not applicable, since oil and gas exploration rights or concessions can only be granted to PEMEX.
- 12.Who has title to assets imported to develop and produce petroleum hydrocarbons?
Since oil and gas exploration and production activities can only be carried out by PEMEX, this question is only relevant for contractors, suppliers or service providers engaged by PEMEX. If the assets are imported by a service provider, then the service provider will likely retain title over such assets unless it is expressly agreed that they will be transferred to PEMEX. If the assets are imported by a contractor or a supplier, the assets will be transferred to PEMEX unless it is expressly agreed that the contractor or the supplier will retain title over certain assets. There is no limitation or restriction on the transfer of title to assets leased by PEMEX.
Regarding services provided by contractors or service providers, it is worth mentioning that the Guidelines provide for the inclusion of new technologies, fabrication of prototypes, equipment, works, goods or services, in which case PEMEX may consider a compensation payment for those participants not awarded the final contract and, as the case may be, may also cover the costs for the execution of tests of pilot projects, fabrication of prototypes or the assignment of exclusive rights over such new technologies, fabrication of prototypes or equipments.
- 13.How are federal, state and local governments recompensed for granting companies rights or concessions to conduct oil and gas exploration and production?
This question is not applicable, since oil and gas exploration and production can only be carried out by PEMEX.
- 14.May companies or consortia that hold oil and gas exploration rights compulsorily acquire property or rights of way to carry out exploration or production activities? Are these compulsory acquisitions governed by special judicial or administrative proceedings?
This question is not applicable, since oil and gas exploration and production can only be carried out by PEMEX.
- 15.Are natural gas exploration and production activities regulated separately or subject to the same regulation applicable to oil exploration and production? Are there different royalties or other government charges payable by companies that conduct natural gas production activities?
Natural gas exploration and production activities are subject to the same regulation applicable to oil exploration and production. The second part of the question is not applicable, since gas exploration and production can only be carried out by PEMEX.
- 16.Do foreign ownership restrictions apply to the oil and gas sector in your country?
Yes. Oil and gas activities that are not considered to be part of the Mexican oil industry (see question 1) can be carried out by private entities and are subject to the following foreign ownership restrictions:
- sale of gasoline and distribution of LPG can only be carried out by Mexican individuals or by Mexican corporations with no foreign participation;
- supply of fuels and lubricants for vessels, aircrafts and trains can only be carried out by Mexican corporations with a maximum foreign participation of 49 per cent;
- construction of pipelines for oil transportation can only be carried out by Mexican corporations with a maximum foreign participation of 49 per cent, but the Foreign Investment National Commission can waive this restriction;
- drilling of oil and gas wells can only be carried out by Mexican corporations with a maximum foreign participation of 49 per cent, but the Foreign Investment National Commission can waive this restriction; and
- recovery and exploitation of gas associated to carbon fields, for its sale to PEMEX or for self-supply purposes in accordance with Mining Law, can be carried out by Mexican corporation with a maximum foreign participation up to 100 per cent.
- 17.Are there any minimum domestic participation rules or any labour law rules relating to domestic and foreign workers (eg, permits for foreign workers)?
This question is not relevant, since most of the oil and gas activities in Mexico can only be carried out by PEMEX.
Regarding oil and gas activities that can be carried out by private entities (see question 16), there are no foreign participation restrictions. Foreign workers may render their services to private entities awarded with a service or public works contract and comply with applicable immigration restrictions and requirements.
- 18.Does local law mandate a particular entity with authority over the sector?
This question is not applicable, since oil and gas activities are subject to federal legislation.
- 19.Are there any limitations on vertical integration in the oil and gas industry?
This question is not applicable, since most of the oil and gas activities in Mexico can only be carried out by PEMEX. However, in regard to gas transportation, storage and distribution, vertical integration is not allowed.
- 20.Are oil and gas activities carried out through incorporated entities with limited liability or by consortia or other types of unincorporated joint ventures? Are joint venture partners jointly and severally liable for the obligations undertaking?
This question is not applicable, since most of the oil and gas activities in Mexico can only be carried out by PEMEX. However, most of the oil and gas activities that are not considered to be part of the Mexican oil industry can only be carried out through incorporated entities, with or without limited liability, and when an unincorporated joint venture is allowed, partners will always be jointly and severally liable for the activities carried out by the joint venture.
- 21.May oil and gas be pledged or encumbered to secure the repayment of debt? How?
Under Mexican law, PEMEX is not permitted to grant liens or encumber hydrocarbons to secure the repayment of debt due to the inalienable nature of hydrocarbons, as these are owned by the Mexican nation. However, after the initial sale has taken place, gasoline, gas and other petroleum derivatives will bear no difference with other assets and could be pledged or encumbered to secure the repayment of debt.
- 22.Can oil and gas rights that are subject to a lien be sold or transferred freely by the secured creditor?
- 23.Is oil and gas output freely exportable in your country? Are there any limits or quotas applicable to oil and gas production? Is there access to export pipelines? What licences are required for oil and gas exports? Are duties applicable?
This question is not applicable, since oil and gas output is sold exclusively by PEMEX. Although private entities may transport gas for export purposes through privately owned infrastructure, the first-hand sale of gas is still under the control of PEMEX.
- 24.Are prices for oil and gas set or fixed by the government?
Oil and refined products in Mexico are fixed by the government in and naturally linked to international prices of such commodities. Gas prices are set by the Mexican Energy Regulatory Commission unless there are competitive conditions, in which case prices are set by the market.
- 25.Are oil and gas exports taxed under the general income tax regime or is there specific petroleum tax legislation?
This question is not applicable, since oil and gas output is sold exclusively by PEMEX. There is no specific petroleum tax legislation for exports carried out by private entities after the initial sale of hydrocarbons by PEMEX.
- 26.Do special environmental rules apply to oil and gas exploration and production?
New rules will soon be issued under the Petroleum and Gas Act. Prior to the Energy Reform passed on 2008, there was a void regarding environmental rules for oil and gas exploration and production, and PEMEX was more or less a self-regulated entity on this regard. The Energy Reform included new provisions on this matter that call for a new set of special environmental rules to be put in place. Most of them will probably be Mexican official standards and will be issued by the Energy Ministry and the Environmental and Natural Resources Ministry. Once these rules are enacted, they will need to be observed and complied with by PEMEX and by any of its contractors and service providers engaged in oil and gas exploration and production activities.
- 27.Are environmental regulations in your country consistent with any international standards?
Yes, environmental regulations are generally consistent with international standards. However, special environmental rules for oil and gas exploration and productions are not yet in place although they will be in the near future. It is very likely that they will be consistent with international standards. Derived from the Energy Reform, now PEMEX is obliged to repair the damage and pay for the damages caused to the environment if a judgment orders so to PEMEX.
- 28.Must companies in the oil and gas industry obtain special environmental or other government permits (other than licences or concessions to carry out oil and gas exploration and production) in to operate in your country?
No. There are no special environmental or other government permits required in Mexico for oil and gas activities.
- 29.Does the government (including any development banks or agency) provide financing, subsidy or other support to companies undertaking oil and gas exploration or production?
There are no subsidies or other special financial support for the oil and gas industry. As for financing, there is no special treatment for oil and gas exploration or production activities.
- 30.Are there any tax stability or similar regimes available to foreign investors undertaking investment in the oil and gas industry in your country?
At the moment there are no particular tax stabilities or incentives applicable to investors undertaking investment in the oil and gas industry. There are some tax incentives regarding accelerated tax depreciation applicable to the acquisitions of new fixed assets as well tax incentives for expenses and investments in technological research and development, which are applicable to Mexican taxpayers. To that end, foreign investors can set up a Mexican entity which may qualify as a Mexican taxpayer for said tax incentives.
- 31.Are oil and gas activities generally protected under bilateral investment treaties entered into by your country?
Since under Mexican law private investment is expressly prohibited on oil and gas exploration and production activities, all bilateral investment treaties entered into by Mexico with other nations have an exclusion for oil and gas related activities carried out by PEMEX. However, where foreign private entities are rendering services or performing public works for PEMEX or providing gas storage, transport and distribution activities, such investments will be protected by general bilateral investment treaties.
- 32.Are there any dispute resolution systems specific to the oil and gas industry? Does state immunity apply in disputes?
Regarding works and service contracts, PEMEX cannot submit to the jurisdiction of foreign courts regarding activities carried out in Mexico but it can submit disputes to arbitration in accordance with Mexican laws and the international treaties to which Mexico is a party.
- 33.Do anti-corruption rules apply to the oil and gas industry?
There are several regulatory changes affecting PEMX which are aimed at increasing transparency and accountability in the Mexican oil and gas industry. In 2008, new regulatory bodies were created in order to improve the control over the resources, contracts, bidding processes, union expenses, and environmental aspects of exploration and exploitation of oil and gas resources. In addition, new administrative bodies and committees within PEMEX’s board of directors were introduced, alongside to previous agencies, in an effort to control such historical misuse of resources. Such new bodies include the: internal control body; the audit and performance evaluation committee; the auditor; and the federal audit agency.
The guidelines provide that a social witnesses shall participate in the bidding processes on those cases expressly authorised by the board of directors or the Committee of Bidding Processes. Also, bidding processes held under the Guidelines shall be publicised on PEMEX’s website under the terms of the Transparency and Access to Public Information Act.
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