DECOLOGUE OF THE ENERGY REFORM IN MEXICO
Ontier México
July 16, 2014
The Energy reform in Mexico represents a historic transition in the outline of Mexican
economic development and presents a unique investment and business opportunity. With an
unprecedented constitutional reform, the projects of the secondary legislation, which will
deepen the transformation of the energy sector in Mexico, find themselves close to enactment
with full force. Through this article, and pending the confirmation of the details and definitive
wording of the secondary laws, we will summarize the key points of such a controversial and
expected reform.
______________________________________________________________
1.- Will there be an opening in the sector?
The Mexican nation will keep ownership of the
hydrocarbons in the subsoil, however after the
modification of articles 25, 26 and 27 of the
Constitution and through the enactment of nine
new laws and the modification of twelve existing
laws, free competition between the State and
private companies, both Mexican and foreign, will
be permitted in the following activities of the
energy sector: exploration and production,
transformation, logistics and electricity.
Commission on Economic Competition will assure
that a concentration of power in the market is
never created.
…................................................................................
2.- What is the aim of the energy reform?
Much has been talked about the benefits that could
be generated for Mexico and its economy with this
energy reform, the most relevant are summarized
in the following points:

According to the message of President Peña Nieto,
energy reform will allow Mexico to grow more
rapidly and for its economy to become more
competitive on an international level, generating
thousands of new jobs, lowering the cost of energy
and creating bases for economic development for
the country.
The reform has a spirit of openness expressing that
both Mexican companies (“Pemex”) and the
Federal Electrical Commission (“CFE”), shall
compete with private companies. The Federal


Strengthen the competitiveness between the
generators of energy, speed up the
strengthening of the transmission networks,
improve the quality in supply and distribution
and to widen options for the final consumer in
order to satisfy their consumption at more
competitive prices.
Provide Mexico with a modern legal
framework that will strengthen the oil
industry.
Reduce the price of light and the price of gas.
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
Utilize in a more efficient manner and in
larger quantities the natural resources of the
nation.

Create new opportunities for the private sector
so it can participate in a more active manner
in the electricity sector.

Promote transparency and competitiveness in
the electricity sector, allowing greater
competition in the generation and access to
the network.

Promote sustained development of clean
energy through minimal fees or green
certificates.

Strengthen programs for expansion of
transmission and distribution, facilitating the
interconnection of renewable capacities and
reducing power losses in distribution
networks.
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3.- Who is who in the energy reform?
a)
b)
c)
d)
e)
f)
g)
Ministry of Energy (“Sener”): defines the
technical guidelines of contracts.
Ministry of Finance (“SHCP”): sets economic
classifications and taxation.
National Commission on Hydrocarbons
(“CNH”): proposes calls for bids, assigns and
administers contracts.
Mexican Petroleum Fund (“FMP”): this trust
created by the Bank of Mexico will make the
payments of contracts and manage oil
revenues, except those that apply to the
Ministry of Finance.
National Commission on Hydrocarbons
(“CNH”) and the Regulatory Commission on
Energy (“CRE”): regulatory entities with
technical, administrative and budgetary
autonomy.
National
Center
of
Energy
Control
(“CENACE”): responsible for the operational
control of the electrical system, the operation
of the wholesale market and the management
of access to the national network.
State Production Companies: Pemex and CFE.
Additionally, it calls for the creation of the
National Agency of Industrial Security and
Environmental Protection of the Hydrocarbon
Sector, which will establish specialized technical
criteria that seeks greater protection for the
environment.
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4.- What are
Companies?
the
State
Production
Pemex and CFE shall cease to be decentralized
organizations and will become State Production
Companies, taking budgetary, technical and
managerial autonomy and a new tax regime to
higher profitability and will have the ability to
freely determine worker wages. These Production
Companies must also comply with state laws
pertaining to the Mexican stock market, which will
mean greater control, transparency and reporting
requirements for these entities.
The reform has a spirit of openness, it will cause
both CFE and Pemex to compete with other
companies. Therefore, they will not need the
approval of the Ministry of Finance to make or
modify their budget, provided they meet a debt
and spending limit previously set by Congress.
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5.- Will this reform affect clean energies?
To comply with the constitutional mandate of
sustainability in an electricity industry that seeks
to achieve the national goals of generating clean
energy efficiently and at the lowest cost to the
country, the Electricity Industry Law project
creates a set of obligations on large consumers of
energy called "Qualified Users" and utility
companies to purchase clean energy certificates.
This mechanism requires companies to support
the national commitment to clean power
generation, distributing costs among the
participants of the electricity industry.
Companies generating energy must: (i) formalize
corresponding interconnection contracts as
mandated by the CRE, (ii) operate their electrical
centers as instructed by the National Center for
Energy Control (“CENACE”), (iii) secure
the
maintenance of their electrical centers through the
coordination and instruction of CENACE and (iv)
notify such body of the programmed withdrawal of
their electrical centers.
This mechanism of certificates allows different
technologies to compete efficiently with one
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another and allow generators of clean energy
sources to interconnect without the delays or cost
overruns that currently exist. In this way, it will
allow the improvement of infrastructure to draw
energy from zones with high renewable potential.
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Production Company with at least 20% of the
projects investment.
b)
6.- What will be new in hydrocarbons?
The basic premise of the proposed Hydrocarbons
Law is that hydrocarbons remain the property of
the nation, however, Mexico will allow the
concurrence of private investment to explore and
exploit new oil reserves / or natural gas, which
requires implementing regulations that provide the
legal certainty and security that the private sector
needs.
Depending on the type of activity performed, we
can distinguish between:
a)
Exploration
and
extraction
activities
("Upstream") exploration and extraction
activities are strategic, but the private sector
can participate individually or in association
with Pemex, through bids or concessions.
The Mexican State through the so-called
"Round Zero," will assign in favor of State
Production Companies the rights to carry out
exploration and mining activities. After Round
Zero, the state will start with the new bidding
process, in which individuals can participate
for such activities primarily through contracts
with the National Hydrocarbons Commission,
bids and partnerships with the state.
To perform superficial discovery and
exploration activities, previous authorization
is required from the National Commission on
Hydrocarbons and only societies created and
constituted according to Mexican laws will be
considered as contractors able to perform
activities of exploration and extraction. As an
exception, foreign investment will be allowed
in services supporting the exploration and
extraction of hydrocarbons.
Exploration and extraction contracts over
cross-border reservoirs require the obligatory
participation of Pemex or another State
Other
activities
("Midstream
and
Downstream"): Mexican midstream and
downstream sectors of oil and hydrocarbons
are open for private participation, but that
participation is subject to obtaining a permit
from the competent authority.
Permits for treatment activities and petroleum
refining, natural gas processing, import /
export of oil, LP Gas, petroleum products and
petrochemicals, as well as for the transport
and storage of LP Gas out of pipelines, will be
awarded by the Ministry of Energy ("Sener").
Permits for the transportation, storage,
distribution,
compression,
liquefaction,
compression, regasification and sale to the
public of hydrocarbons, petroleum and
petrochemicals, as well as for storage and
transportation of Gas LP through pipelines
shall be awarded by the Regulatory
Commission of Energy (“CRE”).
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7.- What about electricity?
Despite the changes proposed by the Electrical
Industry Law project, public service transmission
and distribution will continue to be provided by
the CFE, remaining as strategic areas planning and
control of the National Electric System ("SEN")
and the transmission and distribution of electric
energy, opening participation for third parties in
the other activities of the electricity industry, such
as generation and marketing.
The CFE will continue to supply electricity to small
and medium business users and industrial and
residential users. Meanwhile, large consumers,
known as Qualified Users may contract their
supply directly from a new electricity market
operated by the CENACE, which will receive bids
from generators and the demand from users.
Therefore: (i) energy prices will be freely
negotiated between generators, marketers and
Qualified Users, (ii) the Ministry of Finance and
Public Credit (“SHCP”) will retain the power to set
rates for the users of basic services and (iii) the
CRE will regulate rates for transmission and
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distribution. The objective of the electricity market
is to make it easier for generators to find buyers for
its energy and to create a more efficient
management of distribution networks.
In said market, transactions will be conducted for
the sale of: (i) electrical energy, (ii) connection
services included in the electricity market; (iii)
products that ensure the adequacy of resources to
meet electricity demand via imports or exports,
(iv) financial transmission rights, (v) clean energy
certificates, or, if applicable, certificates of
contaminant emissions (vi) other products, rights
to charge and penalties that are required for the
efficient operation of the National Electricity
System.
Furthermore, generators con make long-term
energy contracts with Qualified Users and in this
manner set prices with anticipation.
Investors may become qualified service providers
and offer innovative services and prices and sell
energy directly to Qualified Users and the CFE
through auctions. For its part, the State may enter
into contracts and partnerships for the operation
of their distribution networks, allowing companies
with experience and the latest technology to
access, expand and improve the transmission and
distribution networks in the country, which will
give CFE an important tool to combat energy
losses and increase the efficiency in the process of
electric energy distribution.
Policy, regulation and oversight of the electricity
industry is mainly implemented through SENER
and CRE: (i) Sener will establish the design of the
initial market, will be responsible for planning the
electrical system and will have supervisory powers;
For its part, (ii) the CRE will regulate rates for
segments outside the electricity market, will
regulate the system reliability and oversee the
continued development of market rules.
Finally, we believe it is important to point out that
the proposed law calls for a Universal Electric
Fund as a financing vehicle for the electrification
of rural communities and marginalized urban
zones.
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8.- What will happen with gasoline and
diesel?
The Energy reform states that the exploitation,
exploration, processing, distribution and storage of
hydrocarbons will open to the market as soon as
the remaining secondary legislation is approved by
the Mexican Congress, however, the opening of
gasoline commercialization will be gradual over
the next three years. During this period, Pemex
will be the sole authority for the marketing of
hydrocarbons. Below is an outline on the various
stages of this opening process:

In 2014 prices will be determined in
accordance to the existing legal provisions in
force.

After January 1, 2015 and at maximum, until
December 31, 2017 the regulation on
maximum public price on gasoline and diesel
will be established by the Federal Executive,
taking into consideration the expected
inflation of the economy.

After January 1, 2018 prices will be
determined under market conditions.

Until December 31, 2016 only Pemex and its
subsidiaries are allowed to import gas and
diesel.

Starting January 1, 2017 or before if the
market conditions allow it, permissions for the
importation of gasoline and diesel will be
given to anybody interested if he complies
with the applicable laws.

Permits for the sale of gasoline and diesel to
the public will be given by the Regulatory
Commission of Energy (CRE) starting January
2016.

The duration of supply contracts subscribed
by Pemex or its affiliates may not exceed
December 31, 2016.

At any time, if in the judgment of the Federal
Commission on Economic Competition
conditions of effective competition arise
before the stated timeline, the referred
timeline will be reduced.
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9.- Will corruption be reduced?
The energy sector in Mexico has historically been
linked with all kinds of corrupt practices, for that
reason after the adoption of the energy reform, all
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contracts will go through a thorough public
scrutiny, which may be summarized in the
following sections: (i) direct appropriations are
eliminated, and a procurement procedure is
expected through bids, (ii) all bidding rounds will
be public and transmitted in real time via the
Internet, and the sessions of bids will be held in
public sessions (iii) contracts will contain clauses
on transparency so they can be viewed by all
stakeholders, (iv) costs incurred and payments
received by companies will be public, (v) the State
will have to publish the report of all resources
generated from the extraction of hydrocarbons (vi)
discretionary decisions by a single authority will be
avoided, (vii) there shall be a system of external
audits to monitor the effective recovery of costs,
(viii) there will be support from coordinated
regulatory entities, the National Commission on
Hydrocarbons and the Regulatory Commission of
Energy will hold public meetings, which will
involve advertising their agreements and
resolutions, and (ix) every case will require that
more than one commissioner meets with the
interested companies and minutes of any
agreement will be submitted, commissioners
should refrain from participating in cases where a
conflict of interest exists and shall conduct
themselves in adherence to a code of ethics.
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


An increase in generation capacity of more
than 55,000 MW (65% of the total) to satisfy
they electricity demand for the next 15 years.
An increase of 15% in the generation of non
fossil fuel electricity by 2024.
A 17% expansion of the electrical transmission
grid over the next 10 years.
10.- What are the most important figures of
this energy reform?
Despite having a huge energy potential, today
Mexico imports 33% of its natural gas, 50% of its
gasoline, 65% of its petrochemicals, 30% of its LP
Gas and 70% of its fertilizers. In accordance with
public data, the energy reform is estimated to
obtain the following results:




The creation of 500 thousand additional jobs
in 2018 and 2.5 million in 2025.
A 1% increase in GDP in 2018 and 2%
additional increase in 2025.
The growth in the production of petroleum,
from 2.5 million barrels a day in 2013 to 3
million barrels a day in 2018 and 3.5 million
in 2025.
A increase in the production of natural gas
from 5.7 billion cubic feet daily in 2013 to 8.0
billion cubic feet daily in 2018 and 10.4 billion
in 2025.
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