This alert describes the most relevant aspects of the Initiatives of the Secondary Laws implementing the Energy Reform, submitted to the Mexican Congress on April 30, 2014.

Background

On December 20, 2013, the Federal Official Gazette (DOF) published the amendments to the Mexican Constitution for energy-related matters (the Constitutional Amendments). These amendments became effective the day after their publication.

In accordance with the Constitutional Amendments, it was established that the Mexican Congress shall perform the appropriate adjustments to the legal framework within 120 calendar days after the entry into force of said Constitutional Amendments.

On April 30, 2014, the President of Mexico presented to the Senate, for its review and approval, the Initiatives of the Secondary Laws to implement the Constitutional Amendments (the Initiatives).

Initiatives

The package of Initiatives is comprised of 21 laws, divided into nine blocks, proposing the creation of nine new laws and the amendment of twelve existing laws.

This integral Energy Reform fully opens the Mexican oil & gas industry to a 100% foreign investment in the upstream (production sharing contracts, profit sharing agreements and licenses agreements), midstream (basic petrochemicals, transportation and storage of crude oil and refined products) and downstream (refining and commercialization of fuels) activities. As of January 1, 2017, CRE may grant all permits for retail sales of gasoline and diesel to the public. Finally, cabotage (coastal navigation) for the hydrocarbons industry is proposed to be opened to a 100% foreign investment.

In connection with the electricity industry, the major structural change is the opening of the generation and supply of electricity activities to private and foreign investment.  Regarding transmission and distribution of electricity, there are still restrictions as explained in this GT Alert.

Through the proposed reforms, the Mexican Government seeks to increase the energy security of the Nation, stimulate economic development, increase the creation of jobs, as well as increase the revenue of the Mexican Government and the income of the Mexican people. Regarding hydrocarbons, the proposed reforms seek (i) to obtain restitution rates greater than 100% for proven reserves of oil & gas, (ii) to increase the current oil production from 2.5 MMbpd to 3 MMbpd in 2018, and to 3.5 million MMbpd in 2025, and (iii) to increase the current production of natural gas from 5.7 BCFD to 8 BCFD in 2018, and to 10.4 BCFD in 2025.

The objectives of the energy reform include the creation of 500,000 additional jobs during the current six-year presidential term and 2.5 million jobs by 2025; and increase economic growth by 1% by 2018 and by approximately 2% more by 2025.

Additionally, it seeks to develop a solid and competitive electric power market that will contribute to the economic growth of Mexico, modify the structure of the Mexican electric power industry and improve the options of electric power supply by creating a competitive environment leading to reduction of costs and competitive rates on an international level.

Below are the descriptions of the most relevant points of the Initiatives per block:

• Hydrocarbons

• Electric Power

• Geothermal

• Industrial Safety and Environmental Protection

• State Productive Companies

• Regulators and Organic Law of the Federal Public Administration

• Tax Regime

• Mexican Oil Fund for Stabilization and Development

• Budget

Additional laws or amendments to existing laws may be introduced to the Congress later this year to provide further changes regarding alternative energies and clean technologies.

It is expected that the Initiatives will be approved by the Congress at the end of June 2014. Once the above is achieved, the Regulations to the laws shall be issued within six months.