Reforma Energética, Energy Reform, Reforma Constitucional, Leyes Secundarias. www.reformaenergetica.gob

1. Mexico’s Energy Reform
May 2014
www.reformaenergetica.gob.mx

2. 1. Constitutional Energy Reform
2. Secondary Laws Proposal
– Exploration and Production
– Oil & Gas Fiscal System
– Downstream and Midstream
3. Investment Opportunities
4. Expected Benefits of the Energy Reform
CONTENT

3. CONSTITUTIONAL AMENDMENT
3
December 2013: a historic constitutional energy reform was passed in Mexico. This is the
most significant overhaul of the energy sector in the country in over half a century:
 Twenty one transitory articles established provisions for the drafting of the secondary laws proposal, in
order to implement the constitutional reform.
Article 27Article 25 Article 28
The Government will:
• Continue to be in charge of
strategic areas
• Maintain ownership and control
of public entities and new state-
owned productive enterprises
• Provide the right conditions to
include the private sector in
national economic development
• Be in charge of energy planning,
productivity and sustainability.
• All hydrocarbon resources will
continue to be owned by Mexico
• Petroleum exploration and
extraction activities will be
carried out by the State through
entitlements and contracts
• Planning and control of the
electric system will be carried
out by the State
• Regarding transmission and
distribution of electricity the
State will be able to contract with
the private sector
• The National Hydrocarbon
Commission (CNH) and Energy
Regulatory Commission (CRE)
are significantly strengthened,
becoming Coordinated
Regulatory Entities
• The Mexican Petroleum Fund
is established

4. 4
In order to consolidate a new legal framework for the energy sector, nine initiatives
(comprising 21 existing and new laws) were sent to Congress on April 30, 2014:
Legislation INICIATIVE
1.
Hydrocarbon Law
1. HYDROCARBONS DECREE
2.
Foreign Investment Law
3.
Mining Law
4.
Law of Public and Private Associations
5. Law of the Electric Industry 2. ELECTRIC DECREE
6. Geothermal Energy Law
3. GEOTHERMAL DECREE
7. National Water Law
8.
Law of the National Agency of Industrial Security and
Environment Protection in the Hydrocarbon Sector
4. AGENCY DECREE
SECONDARY LEGISLATION

5. 5
Legislation INICIATIVE
9. Pemex Law
5. STATE-OWNED PRODUCTIVE
ENTERPRISES DECREE
10. Federal Electricity Commission Law
11. State Owned Enterprises (Paraestatales) Law
12. Public Sector Acquisitions, Leasing and Services Law
13.
Public Works and Related Services Law
14. Coordinated Regulatory Entities of the Energy Sector
Law 6. REGULATORS DECREE
15. Organic Law of the Federal Public Administration
16. Hydrocarbon Revenue Law
7. FISCAL DECREE
17.
Federal Rights Law (Payments for the use of good or
services provided by the State)
18. Fiscal Coordination Law
19.
Mexican Petroleum Fund for Stabilization and
Development Law
8. MEXICAN PETROLEUM FUND
DECREE
20. Federal Law on Budget and Treasury Accountability 9. BUDGET DECREE
21. Public Debt General Law
SECONDARY LEGISLATION

6. Entitlements
• Right to explore and extract hydrocarbons on behalf of the State
• Exceptional mechanism allocated only to Pemex and state-owned
enterprises
Contracts
• Signed with Pemex, Pemex in association with other companies, or private
companies
• Awarded by tender to the best offer for the State
• Administrative revocation due to serious misconduct or nonfulfillment
• Arbitration according to Mexican laws (location is contractual)
• The owner of a mining concession may obtain a contract for the gas
associated to his coal mine
• Report of expected benefits for accounting and financial purposes is allowed
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EXPLORATION AND PRODUCTION

7. Transboundary fields
• The State can award strategic projects directly to Pemex (through entitlements)
• Contracts will include direct participation of State investment (at least 20%) in
areas where there could be a cross-border site
• Exploitation will be conducted in accordance with international treaties
Superficial exploration
• Pemex, Pemex in association with other companies, or private companies
• CNH authorizes superficial studies
• Companies retain commercial rights of interpreted data
• All obtained information belongs to the State and must be submitted to CNH,
who will manage it at the National Hydrocarbons Information Centre
Trading
• Contractors may freely trade the hydrocarbons they receive
• The State will trade its hydrocarbons through a retailer hired by CNH through
public tender
• CNH may directly contract Pemex as retailer (until December 31, 2017)
EXPLORATION AND PRODUCTION

8. • A flexible contracting framework with standard, well-known-by-industry models will enable
a better use of Mexico’s resources to maximize the State’s revenue:
Contract’s fiscal terms:
i. License: Onerous transmission of hydrocarbons once they have been extracted from the subsoil
ii. Profit sharing: % of profits
iii. Production sharing: % of production
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License Profit Sharing
Production
Sharing
Where is it
established?
Corporate Tax (ISR)    
Hydrocarbons
Income Law
Surface exploration fee    
Hydrocarbons
Income Law
Royalty    
Hydrocarbons
Income Law
Signature bonus     Contract
State income

(Net
Profit
Oil Tax)

(Gross
Profit Oil
Tax)
 
Tender
(bidding
variable)
State share    
Tender
(bidding
variable)
Cost recovery     Contract
% Cost limit    Contract
Adjustment mechanism     Contract
OIL AND GAS FISCAL SYSTEM

9. • Specific values for the fiscal terms will be determined case by case, according to the specific
characteristics of each field
• Contracts will have an adjustment mechanism to control extraordinary profitability
• License’s fiscal terms will include a signature bonus indicative of the seriousness of the offer,
that will:
- Increase the cost of entry, reducing moral hazard and preventing speculation
- Provide a financial incentive, although minor, to seek an early production and recover
the investment
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OIL AND GAS FISCAL SYSTEM

10. • Chooses blocks for bidding
rounds (companies may
propose areas of interest)
• Defines contract type and
contractual terms
according to each area’s
geological features
• Designs bid terms
• Approves exploration and
development plans
• Allocates and revokes
entitlements
• Conducts bidding rounds
• Awards and signs
contracts
• Manages and supervises
contracts
• Evaluates and supervises
exploration and
development plan
• Authorizes well-drilling
(exploration, deep water,
and typical well)
• Authorizes seismic studies
• Manages sector
information
• Determines fiscal terms
of contracts and bids
• Establishes tender’s
awarding variable
• Supervises accounting
costs
• Income and sales taxes
go to the Treasury
• Contributions related to
the economic rent of oil
go to the National
Petroleum Fund (Bank of
Mexico)
HYDROCARBONS EXPLORATION AND PRODUCTION

11. NATURAL GAS
Rules
• Open access to pipelines, subject to CRE’s
certification and regulation
• Unused reserve capacity must be offered to
the market under an open season modality
• The owners of pipeline permits are not
allowed to trade the hydrocarbon
• The CRE will regulate and supervise the
performance of the National Center for
Control of Natural Gas (CENAGAS)
• Pemex will transfer to CENAGAS its
pipeline infrastructure in natural gas as well
as the contracts reserving capacity
• Main duties:
o Management of the pipeline network and
storage infrastructure of natural gas
o Propose to SENER the expansion and
optimization plans for the pipeline
network and storage infrastructure
o Coordinate maintenance plans
o Provide transportation services with its
own infrastructure
CENAGAS
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12. GASOLINE AND DIESEL
• Refine oil and import gasoline and diesel (private companies can import after 2019)
• Transport and storage fuel
• Have open access to pipelines and storage terminals.
PEMEX and private companies will:
Fuels market will have the following characteristics:
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• Maintains sales tax on
gasoline and diesel
• Grants permits for oil
refining and natural gas
processing
• Grants permits for:
- Commercialization of
gasoline and diesel
- Transportation, storage
and distribution of
hydrocarbons
- Price regulation of
hydrocarbons and tariff
of permits

13. • Retail sales under Pemex franchise
• Possibility to sale Pemex products under other brands after 2017; maximum price adjusted
by price index
• Retail sale of other products starting 2019
• Gradual transition to price liberalization of gasoline and diesel; free prices in 2020
Gas Stations
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GASOLINE AND DIESEL

14. INVESTMENT OPPORTUNITIES
Transportation, Storage,
Distribution and
Commercialization
Exploration and
Production
Refining and Natural
Gas Processing
• Construction and
operation of
pipelines and
storage terminals
• Construction and
operation of
refineries and
petrochemical
centers
•Onshore and shallow
waters in
conventional
resources
•Shale oil & gas
•Deep water
Services
• Materials supply
for the extraction
of hydrocarbons
• Maintenance of
existing
infrastructure
• Pipeline
construction
• Platform
construction
• Other services to
the industry
 In oil and gas,
resources available
for bidding will be the
equivalent to at least
38 years of Mexico’s
current production
Opportunity for private investment:
 In natural gas, 29% of consumption is imported
 In gasoline, 45% of consumption is imported
 In petrochemicals, 75% of consumption is
imported
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15. EXPECTED BENEFITS OF THE ENERGY REFORM
Benefits 2013 2018 2025
Oil production
(million barrels per day)
2.5 3.0 3.5
Natural gas production
(million cubic feet per day)
5,700 8,000 10,400
• Additional 1% of GDP in economic growth by 2018 (3% by 2025).
• At least 10 billion dollars per year of foreign direct investment (upstream)
• 500,000 additional jobs by 2018 and 2.5 million by 2025
• Lower price of electricity and natural gas
15

16. Mexico’s Energy Reform
May 6, 2014
www.reformaenergetica.gob.mx