OGEL Special Issue Introduction: Mexico's Oil and Gas Sector Reform
Article from: OGEL 1 (2016), in Editorial
I am pleased and honored to serve as the editor for this special issue on the Mexican Energy Reforms. The pace of the reforms since 2013 have been nothing short of remarkable. What makes Mexico especially interesting to me has been the history of oil and gas exploration and development. Mexico is the only country outside the United States (and to a certain extent Canada) to develop its oil and gas resources under a theory of private ownership of minerals in situ.
In 1584, Phillip II of Spain proclaimed an ordinance, later extended to the Spanish Empire, including Mexico, granting persons the right to mine minerals upon registration of their claims and payment of royalty to the Crown. Following Mexican independence, individual states asserted title to minerals, but crown or federal ownership of minerals was established in the 1857 Mexican Constitution. This changed during the Díaz dictatorship in 1884 when minerals were deemed the exclusive property of the owner of the land. Although the law was controversial and subject to various interpretations, oil men, including Edward Doheny and Sir Weetman Pearson, exploited Mexico's Golden Lane in the early 1900s based upon the assumption that they had title to the petroleum in situ beneath the lands of haciendas under which they held grants. Most of this exploitation occurred simultaneously with the Mexican Revolution. In 1917, a new revolutionary constitution reasserted federal sovereignty over minerals. This led to over 20 years of conflict between the oil investors and the government about whether the new constitution applied retroactively to established private rights, including lands already developed as well as undeveloped lands granted to oil investors by landowners. In 1938, following a strike by Mexican oilfield workers and governmental executive and judicial actions that supported the workers' demands, the Mexican government expropriated the oil properties of the investors and assigned them to a newly created national oil company, PEMEX. In retaliation, the oil companies in control of world oil marketing embargoed Mexican crude oil exports. The arrogance of the oil investors regarding the Mexican government led to a 75-year period where private oil investment, up-, middle- and down-stream, was largely banned in Mexico. Although there were some minor reforms in the early 2000s, which allowed some investments in the petroleum downstream and services contracts in the upstream, the real reforms began in 2013 when the constitution was amended to allow for private investment in the upstream oil and gas sector. For a discussion of this history and the recent reforms, see my two-part article, co-authored with Jay Park, South of the Border, Down Mexico Way, Mexico's Revolutionary Petroleum Reforms (Part 1), __ Nat. Res. L. J. __ (2016) and (Part 2), 61 Rocky Mt. Min. L. Inst. 20-1 (2015).
This special features articles by a diverse group of energy experts.
Dr. Pedro van Meurs, a highly respected economist and President of Van Meurs Corporation, offers a learned economic analysis of the Mexican fiscal terms for various types of oil investments. After offering marginally economic to uneconomic terms in the initial round, the fiscal terms have improved for later rounds with more attractive properties on offer. Nevertheless, the fiscal terms for some accepted bids in the most recent round may become too burdensome if oil prices rebound to mid-2014 highs. The major fiscal concern is PEMEX, which is destined to be taxed at a much higher rate than its competitors unless it migrates its holdings to other forms of investment contracts and then farms out or joint ventures with other investors.
Next, Oscar Roldán, Head of the National Hydrocarbons Commission's National Data Repository, and Professor Isabelle Rousseau at the Center for International Studies of El Colegio de Mexico highlight the importance of the Repository to the Mexican reforms-especially in terms of transparency and reducing corruption risk and in providing a level playing field for all investors. PEMEX has extensive data on existing fields and prospects that was scattered through various PEMEX regional divisions. When fully established, all data will be controlled by CNH and contained within the Repository. Going forward, the policy of the Mexican government is to enlarge and update the data repository so that investors as well as research universities and institutes will be able to examine the data.
Carlos Morán, Cogan and Partners LLP, and Andres Carvallo, J.D. Candidate 2017, University of San Diego School of Law, discuss PEMEX's contracting regime. Their article discusses the PEMEX legal framework, its new procurement process, and key internal rules, guidelines, and policies. The article will be of special interest to services providers exploring doing business with PEMEX in the wake of the recent reforms. PEMEX itself will be challenged to adapt to these reforms, which are aimed at transforming PEMEX from its quasi-government-agency status to that of a competitive company.
David Auty and Carlos Canales, partners in Canales Auty, emphasize the importance of conserving Mexico's petroleum resources and protecting its environment. The authors note that while Mexico's petroleum reforms are off to a good and fast start, the implementation of its petroleum reforms must be done with an eye toward conservation-both in the traditional and modern sense of the term. Traditionally, petroleum conservation focused on the prevention of waste-the development of petroleum so as to minimize depletion rate of reserves, and on the protection of correlative rights-the development of petroleum so as to provide investors with a fair opportunity to recover hydrocarbons without waste. In the modern sense, petroleum conservation also means using best practices to protect health, safety, and the environment. For a mature producing nation like Mexico, specific conservation techniques includes sharing infrastructure capacity-especially offshore, requiring effective enhanced recovery, preventing oil spills, environmental assessments and protection measures, and safeguarding human rights. This article also briefly discusses conservation issues relevant to the development of transboundary resources along the US border.
Daniel García-Barragán Lopez, Chadbourne & Parke LLP, discusses some problems with enforcing arbitral awards in the United States against PEMEX. Notwithstanding the move to make PEMEX a competitive oil company within Mexico, it is still a state-owned company. Hence, the US Foreign Sovereign Immunity Act may continue to be implicated when it comes to enforcement of arbitral awards against PEMEX and its affiliates in the United States.
Pablo Cano Trilla, Oil & Gas Associate at the London Centre of International Law Practice, addresses the potential liabilities associated with deepwater petroleum operations in Mexico. Mexico recently approved environmental regulations for offshore petroleum operations, including regulations to make polluters strictly liable for damages to the environment without limit. This uncapped liability is coupled with a requirement that operators maintain environmental risk insurance. This article discusses uncertainties about the insurance requirement, including the scope of coverage and the appropriate policy limits. The author recommends establishing a ceiling for the required financial guarantees but tailored to the operator and the particular operations, with a tie in to the required insurance. Otherwise, the author is concerned that oil companies may be discouraged from investing in Mexico.
Daniel Huth, Foreign Associate, Von Wobeser y Sierra S.C. Mexico, who specializes in international arbitration, energy resources and oil and gas, offers advice to the Mexican government on how to make its deep- and ultra-deepwater blocks more competitive internationally by arguing that Mexico consider offering licenses patterned after the new UKCS Promote Licenses and Frontier Licenses—license forms that are aimed at keeping the high-cost UKCS competitive in a low price environment. He also makes other suggestions, including that Mexico simplify its administration burden by offering licenses, rather than PSCs.
Mexico has undertaken a wholesale reform of its petroleum sector. New constitutional provisions, new laws, new regulations, new contracts, and a new framework-all to the end of creating a modern petroleum regime that will be attractive to investors. The speed, complexity, and thoroughness of these reforms in truly remarkable. Although the initial competitive bid round was disappointing, more recent bid rounds have been successful. While the downturn in oil and gas prices contemporaneous with these reforms suggests that the reforms were ill-timed, the reforms were long overdue. While the reforms have been both sweeping and welcome, problems remain.
- First and foremost is the future of PEMEX, which cannot compete under the current tax regime. The migration of PEMEX holdings to reform contracts cannot occur soon enough for the company.
- Second, the hydrocarbons law gives priority to oil and gas operations over competing land uses. While this may appear desirable to petroleum investors, this priority rule may lead to serious land-use conflicts, especially in regions where indigenous populations reside.
- Third, Mexico's unconventional shale resources occur in one of the most arid parts of Mexico. Fairly and responsibly allocating scarce water resources in this region will be challenging.
- Fourth, investors entering Mexico to engage in petroleum operations-especially onshore-must be mindful of the security risks to their employees and equipment. The drug cartels have diversified their business model and now engage in stealing oil and oilfield equipment and in kidnapping.
- Fifth, although the reforms have done much to assure transparency and to reduce corruption, Mexico ranks 95th of 167 countries on Transparency International's most recent Corruption Perception Index. Corruption enforcement agencies will closely monitor investors in Mexico's petroleum industry for any hint of bribery or corruption.
- Finally, although the petroleum reforms cannot be easily dismantled, they are unpopular with a large segment of the Mexican population. March 28, Oil Expropriation Day, is a national holiday. Accordingly, a change in government could spell trouble for petroleum investors. Hopefully, the need for petroleum investment will be sufficient to dissuade opponents from taking drastic actions should they come to power.
Despite these problems, I remain optimistic about the Mexican oil reforms. I believe the reforms can be very positive for the Mexican economy and for its people.
Owen L. Anderson
Professor and Distinguished Oil & Gas Scholar, Kay Bailey Hutchison Center for Energy Law and Business, The University of Texas School of Law and McCombs School of Business. Professor Anderson is also the Kuntz Chair Emeritus and Cross Research Professor Emeritus at the The University of Oklahoma College of Law.