Mexican Energy Reform

Newly Approved Amendments

to the Energy Sector

Mexican Energy Reform

1 Background

1.1 CONSTITUTIONAL REFORM

The 2013 Constitutional Reform substantially modified the structure of the energy in-dustry in Mexico. Prior to this reform, the primary activities of the energy sector were reserved to the Mexican State and exercised through state-affiliated entities (i.e. PE-

MEX and CFE.)

For ease of reference, this document has been divided into the following sections: (i) Background, (ii) Improvements to the Hydrocarbons Sector, (iii) Improvements to the Electric Industry; (iv) Coordinated Regulating Agencies; (v) Productive Enterprises of the State; (vi) Mexican Oil Fund; (vii) Budget and Treasury; (viii) National Agency for Industrial Security and Environmental Protection; (ix) Land Use and Occupation; and,

(x) Transitory Provisions.

On December 21, 2013, Mexico amended ar-ticles 25, 27 and 28 of its Constitution. These amendments needed secondary legislation to implement the structural changes to the ener-gy sector as mandated by the legislator. Prior the constitutional reform, the participation of private investors in the oil industry was limited, in general, to service agreements with Petró-leos Mexicanos (”PEMEX”.) While the electric industry had already a more flexible legislation prior to the Constitutional reform, the amend-ments allowed a more efficient operation of the Federal Electricity Commission (Comisión Federal de Electricidad, or “CFE”.)

The new status for both PEMEX and CFE as Productive Enterprises of the State (Empresas Productivas del Estado ) aim for transforming them into more transparent and competitive entities, as well as expanding the scope of the participation of the private sector with and along both of them.

1.2 SECONDARY ENERGY RE-

FORM On April 30, 2014, the secondary legislation initiatives were presented to the Congress in order to allow the exercise of the Constitutio-nal reform approved on December 20, 2013. During the following months after the presen-tation of the initiatives, the Mexican Congress has signed into Law different legislative pac-kages, opening the door to the Federal Exe-cutive to create the entities and apply the enacted regulation.

1.2.1 New Legislation Issued

The Energy Reform foresaw the issuance and publication of the following nine new laws:

•Hydrocarbons Act, (Ley de Hidrocarburos, hereinafter referred to as “HA”); •Electric Industry Act (Ley de la Industria Eléc-trica, hereinafter refered to as “EIA”);•Coordinated Regulating Energy Sector Agencies Act (Ley de Órganos Reguladores Coordinados en Materia Energética);•Petróleos Mexicanos Act (Ley de Petróleos Mexicanos, hereinafter referred to as “PEMEX’ Act”); •Federal Electricity Commission Act (Ley de la Comisión Federal de Electricidad, hereinafter referred to as “CFE’s Act”); •National Agency for Industrial Security and Environmental Protection of the Hydrocarbon Sector Act (Ley de la Agencia Nacional de Seguridad Industrial y de Protección al Medio Ambiente del Sector Hidrocarburos hereinaf-ter referred to as the “Agency’s Act”);

•Geothermal Energy Act (Ley de Energía Geotérmica);•Hydrocarbon’s Revenues Act (Ley de Ingre-sos sobre Hidrocarburos, referred to as “HRA”); and •Mexican Oil Fund for Stabilization and De-velopment Act (Ley del Fondo Mexicano del Petróleo para la Estabilización y el Desarrollo.)

1.2.2 Reformed Legislation

Additionally to the new legislation, the fo-llowing existing laws were amended

•Foreign Investment Law (Ley de Inversión Ex-tranjera)•Mining Law (Ley Minera)•Public-Private Association Law (Ley de Aso-ciaciones Público Privadas)•Organic Law of the Federal Public Adminis-tration (Ley Orgánica de la Administración Pública Federal)•Federal Law of Paraestatal Entities (Ley Fe-deral de las Entidades Paraestatales);•Law on Procurement, Leasing and Services of the Public Sector, (Ley de Adquisiciones, Arrendamientos y Servicios del Sector Público)•Law of Public Works and Services (Ley de Obras Públicas y Servicios relacionados con las Mismas)•National Waters Law (Ley de Aguas Nacio-nales)•Federal Law on Budget and Treasury Res-ponsibility (Ley Federal de Presupuesto y Responsabilidad Hacendaria)•General Law on Public Debt (Ley General de Deuda Pública)•Federal Duties Law (Ley Federal de Dere-chos)•Tax Coordination Law (Ley de Coordinación Fiscal.)

2 Improvements to the Hydrocarbons Sector

The purpose of the HA and the HRA is to re-gulate three broad categories of the oil sec-tor: exploration and production activities (referred to as “upstream activities” or E&P;) transportation and storage of hydrocarbons (referred to as “midstream activities”;) and processing and marketing activities (referred to as “downstream activities”.) Upstream ac-tivities have a different regulation scheme, as explained in the following section.

2.1 INVESTMENT MODELS FOR UPSTREAM ACTIVITIES

The Reform enables private investors to par-ticipate in oil and other hydrocarbons E&P, through two distinct mechanisms: (i) by means of assignments (“Assignments”) to a Producti-ve Enterprise of the State (i.e. PEMEX,) or (ii) by means of E&P contracts to private investors.

2.1.1 Assignments

According to article 4 of the HA, an assign-ment is the right granted by the Secretariat of Energy (Secretaría de Energía, hereinafter referred to as “SENER”,) to carry out E&P acti-vities in a determined area for a specific pe-riod of time. The assignments will be granted following the issuance of a favorable opinion by the National Hydrocarbons Commission (Comisión Nacional de Hidrocarburos, he-reinafter the “CNH”,) based on the following requirements:

•Determination of an Assignment area; •Conditions and mechanisms for the reduc-tion or reversion of the Assignment•Effective term of the Assignment and condi-tions for its extension•Guarantees and insurances•Minimum national content requirements; and •Deadline for presenting the exploration plan or development plan for production.

SENER will be the authority entitled to grant the permits, but it will also be responsible for revoking the Assignments in the following ca-ses:•If the assignee has suspended its activities•If the Assignment has not been exercised in more than 180 continuous days•The assignee does not comply with the au-thorized plan for exploration and develop-ment

As a result of a revocation, the assignee shall return the assigned area to the State, without any encumbrance, payment, or compen-sation. Although the law is silent about the destiny of the area formerly assigned, it is fo-reseeable that same will be subject to new bi-dding processes thorugh E&P contract sche-mes as described in section 2.1.2. below.

1.2.3 Decrees based on the is-sued Legislation

Additionally, the following Regulations have also been issued by the Federal Executive:

•Decree creating the National Center for the Control of Electricity (Decreto por el que se crea el Centro Nacional de Control de Ener-gía); and•Decree creating the National Center for Na-tural Gas Control (Decreto por el que se crea el Centro Nacional de Control de Gas Natu-ral.)

2.1.1.1 Round Zero

“Round Zero” is the mechanism by means of which PEMEX will be allowed to decide the production or exploration fields it wants to re-tain, and which ones will be open to private investors. Once exercised this preferential ri-ght, SENER, prior the favorable opinion of the CNH, will grant and/or modify the areas to be assigned for exploration and extraction. If one of PEMEX selected areas is denied or if it doesn’t exercise his preferential rights towards the assignment, the CNH will transfer the rights over those areas through biddings in the open market, as described in section 2.1.2.

2.1.2 Biding schemes: Contracts

E&P contracts will be awarded in accordan-ce with standards set by the Secretariat of Finance and Public Credit (Secretaría de Ha-cienda y Crédito Público, hereinafter referred to as “SHCP”), as stated in the HRA. The Constitutional Reform specifies four con-tractual mechanisms by means of which pri-vate parties are able to participate in the hy-drocarbon sector, specifically: • License Agreements (Contratos de Licen-cia); •Profit-sharing Contracts (Contratos de Ga-nancias Compartidas); •Production-sharing Contracts (Contratos de Producción Compartida); and, •Service Contracts (Contratos de Servicios.)In some cases, SENER will require a direct par-ticipation of the Mexican Government in case of cross-border deposits (i.e. between U.S.A and Mexico) as stated in the HA , according to the following percentages and criteria:•If the contract’s area overlaps with an assig-ned area. •Up to a maximum of 30%, where there are opportunities to promote the transfer of knowledge and technology in furtherance of the development of the capabilities of PEMEX or other state productive companies;•Up to a maximum of 30%, in the case of pro-jects that are intended to be undertaken via the Mexican Oil Fund, or •For a minimum of 20%, for contractual areas where there is a possibility of finding cross-bor-der deposits.

An important point to note is that E&P con-tracts will be governed by Mexican Legisla-tion, and shall exclude the possibility that such agreements are subject to foreign law. Also, the Spanish language arbitration is contem-plated as an alternative dispute resolution mechanism, with the ruling of such arbitration to be binding upon the parties. Such arbitra-tion requirement shall be applicable to any dispute, with the exception of a dispute rela-ted to administrative rescission.

2.1.2.1 Licence Agreements

The HRA provides that License Contracts in-clude the following forms of consideration:In favour of the Mexican State:•Contractual fee for the exploratory phase;•Royalties;•A signing bonus upon execution of the con-tract, which consists of an amount specified during the bidding process, and which is to be paid in cash by the Contractor to the Mexi-can State. This amount shall be independent of the profitability of the project.In favour of the Contractor:•The transportation of hydrocarbons that have been extracted from the subsurface wi-thin the contract area, provided that they are compliant with respect to the consideration payable to the State, pursuant to the terms of the relevant contract.

2.1.2.2 Profit-sharingCon-tracts and Production-sharing Contracts

The difference between Profit-sharing Con-tracts and Production-sharing Contracts stems from the manner in which a considera-tion is calculated and paid. In the first case the consideration is paid in cash, while in the latter case it is paid in kind, by means of a per-centage of hydrocarbons produced. The HRA provides that profit-sharing contracts and production-sharing contracts must inclu-de the following forms of consideration:In favour of the Mexican State:

•The contractual fee for the exploratory pha-se

tructure pipelines and related storage facili-ties. CRE will also be responsible for approving the applicable rates for these services.

2.2.2 Downstream Activities and their Regulation

One of the many functions of SENER will be granting permits for oil refining and processing of natural gas (“Downstream Activities”.) Pri-vate investors are now able to participate in every downstream activity, previously reser-ved to PEMEX. To that end, SENER will grant permits for the following activities:

•Treatment and refining of oil;•Natural gas processing; and,•Export and import of hydrocarbons and pe-troleum.

2.3 OTHER IMPROVEMENTS TO THE HYDROCARBONS SECTOR

2.3.1 Hydrocarbon’s National Transportation System

The HA, in order to foster service, quality and safety improvements, provides that pipeline transportation and storage of natural gas, petroleum and petrochemical systems will be interconnected, creating an integrated sys-tem (“Hydrocarbon’s National Transportation System”) coordinated by an independent manager. This system will have, among others, the following objectives

•Effective open and non-discriminatory ac-cess to transportation systems•Development of market centers and whole-sale markets•Ensure the balance of an integrated system operation; and •Administer the secondary market of integra-ted system capacity

The CRE shall authorize this integration and issue permits to the managers of each part of the integrated system. These managers may be Productive Enterprises of the State, individuals or public-private partnerships. The

managers must be independent from enti-ties carrying out production, distribution and marketing activities for natural gas, petroleum and petrochemicals.

2.3.2 CENEGAS: Regulatory Body of the National Transportation System

The National Center for Natural Gas Control (Centro Nacional para el Control del Gas Na-tural hereinafter referred to as “CENEGAS”,) is an the independent manager and operator of the Hydrocarbon’s Transportation System and has the purpose of guaranteeing the continuity and safety of the supply of natural gas throughout the national territory.

•Royalties•Consideration calculated by applying a per-centage to the amount of operating profit. (This consideration is what distinguishes these two types of contracts.) In favour of the Contractor•Reimbursement for costs, and the remainder of the operating profit, after deducting the amount payable to the state•In Profit-sharing Contracts, contractors sha-ll deliver all production to the marketer that has been selected by the CNH for such pur-pose. The marketer will then deliver the pro-ceeds resulting from the marketing of such hydrocarbons to the Mexican Oil Fund (Fondo Mexicano del Petróleo, hereinafter referred to as the “FMP”,) and the latter will reserve the portion belonging to the state and pay out to the contractor consideration due under the relevant contract. •In a Production-sharing Contract, the costs and the remainder of the operating profit are to be paid in kind to the contractor, as a per-centage of the hydrocarbons equivalent to the amount due. Payment in favour of the sta-te will work in the same way, namely, through payments in kind through delivery of hydro-carbons produced, in an amount equivalent to the amount of the consideration payable. In the latter case, the contractor shall deliver the relevant production to the marketer se-lected by the CNH.

2.1.2.3 Service Contracts

The HRA also provides that the state is entit-led to enter into service contracts for E&P. The minimum conditions for such service contracts include requirements for contractors to deli-ver the entirety of the hydrocarbon produc-tion to the state, and that the contractor’s consideration will always be payable in cash. Such conditions shall be set forth in each con-tract, taking into account relevant industry standards.

2.2 INVESTMENT MODELS FOR MIDSTREAM AND DOWNSTREAM ACTIVITIES

The HA includes a new logistical structure in

order to prevent speculation and promote competition between investors. In particular, those rules are aimed to categorize the ac-tivities and processes of the hydrocarbons market. Midstream activities such as trans-portation and storage, and downstream ac-tivities such as processing and marketing, are now opened to private investment via permits granted by the competent authority.

Industrial processing and logistics are promo-ted by the HA thorough permits issued by SE-NER and CRE, depending on the activity con-cerned, as stated in the following sections.

2.2.1 Midstream Activities and its Regulation

Midstream activities include transportation, storage, distribution, compression, liquefac-tion, decompression, regasification, marke-ting and sales of hydrocarbons oil products to the public, as well as the management of so called “integrated systems” (see Section 2.3.1, infra.)

The HA includes an open access principle in transportation, distribution and storage acti-vities in order to ensure competition in these sectors. This principle entails that permit-hol-ders can provide pipeline transportation and distribution services, as well as storage of hy-drocarbons, petroleum and petrochemicals to third parties (provided they have available capacity that has not been contracted, or that is contracted but not in use.) Permit-hol-ders shall disclose this public information to third parties, and provide open access wi-thout any discrimination with regards to their facilities and services.

The CRE shall grant permits for the following activities:•Transportation, storage, distribution, com-pression, liquefaction, decompression, regasi-fication, marketing and sale to the public of hydrocarbons, petroleum and petrochemi-cals•Management of integrated systemsTo encourage the industry to operate effi-ciently, the CRE will establish principles that will govern open access to transport infras-

3 Improvements to the Electric Industry

The Constitutional Reform substantially modi-fied the electrical industry in Mexico. Prior to it the generation, transmission, distribution, and marketing of electricity, to the extent that is was deemed a public service, was an exclu-sive activity of the state, and was carried out by a state-run entity known as the CFE.

The newly approved EIA establishes the legal framework that shall govern the electric sec-tor, keeping strategic areas reserved for the Mexican Government as the planning and control of the National Electric System (Siste-ma Eléctrico Nacional, typically referred to by its Spanish initials, “SEN”,) and the transmis-sion and distribution of electric power. On the other hand, the EIA opens the market for ge-neration and marketing activities.

The Mexican state has maintained its strate-gic functions with regard to the planning and control of the SEN, as well as the responsibility for the transmission and distribution of electri-city, which continue to be regarded as public services and, consequently, strategic activi-ties reserved for the State; however, private enterprises will now participate in the genera-tion and marketing of electricity, and will also participate in transmission and distribution ac-tivities to a limited extent through contractual arrangements.

As a part of the Reform, the CFE will become a Productive Enterprise of the State. The CFE is entitled to compete with private enterprises

in the electricity generation and marketing industry. At the same time, the CFE will con-tinue to manage transmission and distribution of electricity as a public service. In its capaci-ty as a Productive Enterprise of the State, the CFE will enjoy a special legal regime with the following activities:

•Procurement, leases, services, and construc-tion work•Assets•Budget and public debt; •Administrative responsibilities; •Remunerations; and•Other matters pertinent to the effective rea-lization of its goals.

In sum, the EIA aims to regulate the planning and control of SEN, the transmission and distri-bution of electricity as a public service, and the electricity industry activities identified above.

3.1 PUBLIC SERVICES

The Mexican Government will continue distri-buting and transmitting electricity through the CFE, which is subject to regulation in order to achieve expansion and efficient operation of the electrical grid. SENER will be empowered to issue the transmission and distribution pro-grams, while the CRE will be responsible to de-sign and issue the corresponding regulation.

This legal scheme provides new contracting

modalities between the Mexican Govern-ment and private investors, aiming to contri-bute with its technology and experience to the expansion and improvement of transmis-sion and distribution networks. This change will give the CFE an important tool to combat the loss of energy and increase the efficiency of electrical power distribution.

3.2 ELECTRICAL GRID’S EXPAN-SION

The EIA creates the Electric Service Fund to finance electrification projects in rural com-munities and marginalized urban areas. The fund will be integrated by surpluses resulting from the losses of energy management in the electricity market, thus guaranteeing the exis-tence of resources to finance electrification projects.

3.3 RENEWABLE ENERGY

Certain types of parties are subjected to spe-cific clean energy requirements, including: •Suppliers•Qualified users who participate in the market•Final users who supply themselves via isola-ted supply

In order to satisfy their clean energy require-ments, suppliers, qualified users, and some final users will need to acquire clean energy certificates demonstrating that clean energy accounts for a certain percentage of the to-tal electrical energy consumed in their load centres.

Clean energy certificates are negotiable ins-truments that can be bought and sold throu-gh the wholesale electricity market, and are issued by the CRE. These certificates establish the production of a specific quantity of elec-trical energy by means of clean energy sour-ces, and are used to demonstrate complian-ce with consumption requirements.

3.3.1 CENACE: Regulatory Body of the National Electric System

The National Center for the Control of Electrici-ty (“CENACE” in Spanish Centro Nacional de

Control de Energía) is the agency entitled to control the SEN, provide access to distribution grids, and regulate the electric energy mar-ket. CENACE is also empowered to supervise the following activities:

•Electric Energy buying and selling;•Energy related services, such as voltage re-gulation•Clean energy certificates•Exportation of electric energy•Importation of electric energy

4 Coordinated Regulating Agencies

The Coordinated Regulating Agencies (“Agencies”) are entities created under the Constitutional Reform in order to provide the hydrocarbons and electricity sectors with transparency and anticorruption policies, and granting security to the energy market. Their activities are governed under the principle of maximum publicity, so that the sessions of their governing bodies will be public. In addition, these Agencies will have an advisory council to help in the public consultation process of land acquisition.

In order to have a mechanism of coordination between the Agencies, SENER will be in char-ge of the Energy Coordination Council, whose purpose is to align the objectives and activi-ties of the agencies in order to implement and comply with energy policies.

Each one of the contracts, authorizations, permits, acquisitions, services and works rela-ted with the Agencies will be subjected to the provisions of the Federal Anticorruption Law on Public Procurement (Ley Federal Antico-rrupción en Contrataciones Públicas) as well as other applicable laws relating to transpa-rency and information access.

4.1 HYDROCARBONS NATIONAL COMMISSION

La nueva legislación establece que la CNH The CNH shall exercise its functions ensuring

that projects are carried out under premises that can increase the recovery factor and obtaining the maximum volume of hydrocar-bons in the long term. Another relevant attri-bution is the promotion of technology suitable for E&P activities. For this purpose, the following powers were granted:

•Regulate and monitor the exploration and extraction of hydrocarbons, including their integration into the system of transportation and storage•Sign contracts for exploration and extraction of hydrocarbons•Management of assignments and contracts for the exploration and extraction of hydro-carbons

4.2 REGULATORY ENERGY COM-MISSION

The CRE will be responsible to control and grant permits in order to promote the efficient development of the following activities:

•Transportation, storage, distribution, com-pression, liquefaction, regasification and sale of petroleum, natural gas, liquefied petroleum gas, petroleum and petrochemicals•Transportation by pipelines, storage, distribu-tion and sale to the public of bioenergy•Generation, transmission and distribution of electricity

5 Productive State Enterprises

Based on the Constitutional Reform and con-sidering the challenges that the state-owned enterprises in the energy sector have to face, the adopted secondary legislation creates the figure of Productive Enterprises of the Sta-te, which will give them a corporate charac-ter. The reform strengthens PEMEX and the CFE by turning them into Productive Enterprises of the State, granting them with technical and budgetary autonomy, as well as a manage-ment independent of the federal executive

5.1 ATTRIBUTIONS OF THE EXECU-TIVE BOARD

According to the adopted legislation, one of the mayor improvements is the autonomy of the Productive Enterprises of the State, esta-blishing the following functions:•Defining the strategic vision of the enterprise;•Issue policies on investments and business plans•Monitor and evaluate the performance of the companyThe existing scheme involves a new concep-tion of the role of the federal government in the governing bodies of the Productive En-terprises of the State. In this sense, the federal executive will no longer be entitled to perform the following funtions

•Appoint the members of the Board of Direc-tors and its Director General;•Propose to the Congress the dividend that

the companies will deliver to the State;•To assess the overall performance of com-panies and their executives.

5.2 MONITORING, ANTICO-RRUPTION AND TRANSPARENCY POLICIES

Another element that joined the reform to the secondary legislation on the organization of the Productive Enterprises of the State is the fi-gure of a Commissioner appointed by the Fe-deral House of Representatives, who will have as main function to assessing the company and its Board of Directors.Finally, in terms of fighting corruption, the re-quirement to give a rigorous monitoring not only to the procurement procedure, but also to all the contractual relationships is establi-shed. The Board of Directors of both PEMEX and CFE must issue provisions so that said Pro-ductive Enterprises of the States will have me-chanisms that allow them to prevent, identify, correct and punish corruption acts at the im-plementation and execution of contracts.

6In order to manage the funds of the Mexi-can Oil Industry, the Mexican Petroleum Fund for Stabilization and Development was esta-blished. The Fund will be responsible for the receipt and administration of the resources derived from contracts and assignments, con-tributing to the transparency and accounta-bility policies of the Mexican oil income.

The reform introduces transparency and ac-countability mechanisms of counterweights in the design, bidding, as well as in the techni-cal and fiscal administration of contracts and assignments. Those transparency and antico-rruption policies include the obligation of ha-ving a system of external audits to oversee the effective recovery of costs on contracts.

Other measures include the obligation to re-port information under the best practices in the financial sector, in accordance with the provisions of Stock Market Law (Ley de la Bol-sa Mexicana de Valores.)

Mexican Oil Fund

7 Budget and Treasury

The initiative seeks to regulate a fundamen-tal aspect of the Constitutional Reform: the revenue that the Mexican Government will receive by E&P activities that are property of the Nation, and made under the umbrella of grants and contracts.

In terms of allocations, the amendment set out a significant change to PEMEX fiscal regi-me, in line with the new model for E&P intro-duced by Constitutional Reform in the energy field. Also, the amount of taxes and fees, are significantly reduced.

The tax regime, which applies to the CFE, also changes. Previously, a percentage of the as-sets of CFE was paid to the Federal Govern-ment, regardless Federal and State duties and taxes. After the Reform, CFE is expected to pay taxes and fees as any other Mexican or foreign enterprise.

In reference to the tax on hydrocarbon’s E&P activities, contractors shall be required to pay a tax for the contractual area defined in the applicable contract. Said tax consists of a fee per square kilometer covered by the contrac-tual area; during the exploratory phase the fee will be $1,500.00 Mex. Cy. (or approxima-tely $115.00 US. Cy. at an exchange rate of $13.00 pesos to the dollar,) and during the pro-duction phase $6,500 Mexican pesos. The ex-ploratory phase lasts from the formalization of the E&P contract until commencement of the production phase. The production phase lasts

from the start of activities targeted at com-mercial production until the relevant contract has terminated. The aforementioned fees will be updated annually, on the first of January every year.

7.1 INCOME TAX-RELATED TAX ASPECTS

Deduction percentages. The HRA includes deduction percentages for:

•Investments made for exploration, secon-dary and enhanced recovery, and mainte-nance•Investments made for the development and production of oil or natural gas; and, •Investments made for the storage and trans-portation infrastructure necessary for perfor-ming the contract.In order to determine their income tax, con-tractors must apply the following percenta-ges:•10% of the amount of the original invest-ments made for the necessary storage and transportation infrastructure for performing the contract•25% of the amount of the original invest-ments made for the development of and pro-duction of the relevant oil and natural gas de-posits, every fiscal year•100% of the amount of the original invest-ments made for exploration, secondary and enhanced recovery, and maintenance, du-

ring the fiscal year in which they are made

7.2 TRANSPARENCY AND AUDI-TING

The SHCP shall publish information on the volu-me of hydrocarbons produced, revenues de-rived from same, and the consideration paid to contractors, among other information, with regard to each contract, on a monthly basis, over the internet.

8 National Agency for Industrial Security and Environmental Protection

The Constitutional Reform set the basis for the creation of the National Agency for Industrial Security and Environmental Protection of the Hydrocarbons Sector. This entity will be res-ponsible for regulating and monitoring the hydrocarbon industry in the field of industrial safety, operational safety and protection of the environment.

With respect to its mandate of protection of the environment, the agency will establish the conditions of protection to avoid or mini-mize tampering, characterization and waste management, pollution control and establish technical elements for the country’s environ-mental and energy policies.

To ensure compliance with the provisions applicable to the matter, the agency will im-pose security measures and sanctions.

9The new institutional framework favors the need for schemes to generate virtuous rela-tions between the Mexican State, communi-ties and developers of projects, setting rules to implement social impact assessments and consulting indigenous communities. Thus, the assignees and contractors are obliged to ca-rry out an assessment of the social impact. This assessment must contain the identification, characterization and possible risks that could arise from their activities.

The HA sets forth that the hydrocarbon indus-try is of public interest and, accordingly, au-thorizes the imposition of legal easements and the occupation of land for the performance of hydrocarbon-related activities, pursuant to the applicable provisions equivalent to cases in which same is required by the State. The consideration and the terms and condi-tions for the purchase, surface occupation and use of land, goods, or rights necessary for conducting exploration and production activities shall be negotiated between the owners, possessors, or title-holders to the land, goods or rights in question, and those entities holding the assignments or the contractors. Likewise, such consideration must include, as applicable:

•Compensation payments for goods or rights other than the land and an allowance for da-mages at market value•Rent for occupation, easement, or use of the

Land Use and Occupation

land at market value•If it is a commercial extraction project, a per-centage of the total revenue

The E&P activities are considered of social and public order, so they will have priority over any other economic or social activity involving the use of the surface and subsurface of the land allocated. The secondary legislation establi-shes the mechanism based on transparency principles to define the terms and conditions of the considered purchase, enjoyment or affecting land, assets or rights needed for E&P activities.

10TransitoryProvisions

10.1 HYDROCARBONS SECTOR PROVISIONS

The transitory regime for the hydrocarbons sector includes the following provisions:

•The executive branch shall issue applicable regulations in respect of the HA within the 180 calendar days of the date on which the HA enters into force. Existing regulations in con-nection with the Regulatory Act on Constitu-tional Article 27 relating to the energy sector, regulations on natural gas, and regulations on liquefied petroleum gas shall remain in force until the aforementioned regulations are is-sued, to the extent that they do not contra-vene any provision of the hydrocarbon reform•The following shall remain in force under the terms and conditions under which they were signed or awarded: i) the permits granted by SENER or the CRE to carry out hydrocarbon-in-dustry activities before the HA entered into force, and ii) the contracts for works, services, supply, or operation signed by PEMEX based on the Regulatory Act on Constitutional Ar-ticle 27 (Ley Reglamentaria del Artículo 27 Constitucional en el Ramo del Petróleo.)•The CRE shall continue to subject first-hand sales (i.e., the first transfer of title within the na-tional territory by PEMEX and its subsidiaries, state productive companies, or any legal en-tity on behalf and by order of the state to a third party or among them) of hydrocarbons, oil products, or petrochemicals to asymme-trical regulation principles, with the goal of

limiting PEMEX’s domination, in order to en-courage the participation of more economic agents and to contribute to the efficient and competitive development of the markets.

10.2 ELECTRIC INDUSTRY PROVI-SIONS

The EIA provides for a temporary regime in order to facilitate the gradual implementa-tion of the act, and in order to ensure that the objectives set forth in the act are achie-ved. During this transitional period, the CFE will continue to provide generation, transmission, distribution, and marketing services as it has previously done. Likewise, CENACE (Centro Nacional de Control de Energía) will continue to exercise operational control of the SEN.

The CFE will be required to segregate its va-rious activities, namely generation, transmis-sion, distribution, and marketing, providing each functionality with separate accounting, operational and legal capacities. Contracts entered into, by and between the CFE and third parties that are currently effective, or that have contingent liabilities on the date of such separation, will be transferred to Produc-tive Enterprises of the State, productive state subsidiaries, affiliates, or to CENACE, as appli-cable, under terms defined by SENER. This transfer will under no circumstances result in the termination of such contracts.

Luis R. Vera Morales Partnerlrvera@valegal.com.mx

Alejandro Aldana GalbánPartneraaldana@valegal.com.mx

Gabriel Bustamante BrambilaPartnergbustamante@valegal.com.mx

Gerardo Freyre FregosoPartnergfreyre@valegal.com.mx

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