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Oil and gas regulation in Mexico: overview

by Juan Carlos Serra and Jorge Eduardo Escobedo, Basham, Ringe y Correa SC

 Related Content

Law stated as at 01 Jul 2017 • Mexico

A Q&A guide to oil and gas regulation in Mexico.

The Q&A gives a high level overview of the domestic oil and gas sector, rights to oil and gas, health safety and the environment, sale and trade in oil and gas, tax and enforcement of regulation. It covers transfer of rights; transportation by pipeline; environmental impact assessments; decommissioning; waste regulations and proposals for reform.

To compare answers across multiple jurisdictions, visit the energy and natural resources Oil and gas regulation Country Q&A tool.

This Q&A is part of the global guide to energy and natural resources. For a full list of content visit www.practicallaw.com/energy-guide.

Domestic sector

1. What is the role of the domestic oil sector in your jurisdiction?

Domestic production

In 2016 production of crude oil reached an average of 2,154 million of crude barrels per day (Source: Petrleos Mexicanos (PEMEX)). As at March 2017, production has reached an average of 2,018 million barrels per day. Production of unconventional shale oil has been irrelevant since no techniques to extract those resources have been implemented.

Oil imports/exports market

For decades, oil was only imported by the government-owned production company PEMEX, and imports of oil products by private investors were completely banned. Following Executive Decree dated 1 April 2016, however, imports of oil products are now allowed to private individuals and business entities who have obtained a permit in advance from the Energy Ministry (Secretara de Energera) (SENER). Due to this recent change, products other than those produced by PEMEX have started to be imported. As at May 2017, pursuant to SENER information, 205 permits for the importation of gasolines have been granted, 281 for diesel, 112 for liquefied natural gas and 46 for jet fuel.

Crude oil is usually exported by PEMEX through a subsidiary company, PMI International Commerce. PEMEX is the only company that currently exports crude oil from Mexico, as exploration and extraction contracts have only just been awarded to private companies (see above). The main exported products are:

• Istmo (light crude oil with 33.6° API).
• Maya (heavy crude oil with 22°API).
• Olmeca (very light crude oil with 39.3°API).

Crude oil is mainly exported to North America and Europe.

Domestic market structure

As of December 2013, oil resources were solely owned by the Mexican Government and hydrocarbon activities were exclusively reserved to the state-owned company PEMEX.

However, the Mexican energy sector was significantly reformed in 2013 (see below, Government policy objectives). Underground oil resources are still owned by the Mexican Government. Since the Mexican energy reform, however, private companies may participate in bidding procedures for awarding exploration and extraction contracts. Where private companies are awarded extraction contracts, the resources can be used on the basis of the relevant contract plan.

Government policy objectives

Following the 2013 energy reform, a new legal regulatory framework was issued for the oil sector. Amendments to Articles 25, 27 and 28 of the Mexico's Federal Constitution were approved. Additionally, 21 secondary laws were issued and published in the Federal Official Gazette, followed by 22 regulations. The new government regulatory bodies are continuing to issue administrative regulations and criteria in connection with oil and gas activities.

The main government policy aims are to increase Mexico's oil and gas production through exploration and extraction contracts, as well as by increasing midstream and downstream infrastructure.

Current market trends

Opening of exploration/extraction activities has been relevant to the upstream sector since new private companies have been participating in the seven tenders called by the National Hydrocarbon Commission (Comisin Nacional de Hidrocarburos) (CNH). Tenders were called in 2014, 2015 and 2016. Three of these tenders were concluded in 2015, another one in 2016 and, as of this date, three more are under prequalification process. Exploration and extraction contracts have been already awarded for offshore and onshore oil and gas fields and, although their commercial exploitation is yet to fully begin, these new contracts represent important investments in Mexico.

Additionally, some oil fields awarded to PEMEX in Round Zero have been farmed out by PEMEX. Private companies have also been participating in tenders called by the CNH, to co-operate with PEMEX in working those areas. Four farm out procedures to select a partner for PEMEX, to explore and exploit onshore and offshore oil and gas blocks in the Mexican Gulf have been called: one for ultra-deep waters was concluded in 2016, in which one of the biggest companies in the oil industry was awarded a contract. Currently, three farm out procedures are n process.

2. What is the role of the natural gas sector in your jurisdiction?

Domestic production

According to official data from PEMEX, in 2016, natural gas production was 5,792 million cubic feet per day. Out of this, 3,115 million was extracted from offshore fields, while 2,678 was extracted from onshore fields.

Unconventional oil, such as shale oil, has not been fully developed in Mexico, and therefore the scale of its production is not significant.

Natural gas imports/exports

In 2016, the total export volume of natural gas achieved 2.2 million cubic feet per day. The total import volume of natural gas was 1.93 billion cubic feet. As at March 2017, 2.04 billion cubic feet were imported.

Domestic market structure

As of December 2013, gas resources were owned solely by the Mexican Government and hydrocarbon activities were reserved to the state-owned company PEMEX. However, the sector has now been reformed. It is now possible for private parties to participate in the exploration and extraction of gas resources through bidding procedures (see Question 1, Domestic market structure).

Government policy objectives

See Question 1, Government policy objectives.

Current market trends

The natural gas sector is increasingly important in Mexico, and new pipelines to deliver natural gas have been constructed. The government has launched a natural gas transportation and storage system plan that aims to increase natural gas pipelines infrastructure in 5,150 additional kilometres. In addition, the five-year term exploration and extraction of hydrocarbons bidding plan includes all areas to be bided by government during 2015 to 2019, in which more tenders are to be called by CNH for Round 2 and two more Rounds of tenders (Round 2 and Round 3) are expected to be called during 2018 to 2019.

3. Are domestic energy requirements met by oil and gas production?

Oil requirements

The domestic production of oil resources and natural gas does not meet the national demand. Additional volumes are imported.

In 2015, the total demand of oil products was for 1.35 billion barrels of crude oil equivalent per day, 0.4% more than in 2014. During that year, about 739,800 barrels were imported per day.

In 2016, Mexico imported about 799,500 barrels per day.

As at March 2017, Mexico has imported about 850,800 barrels per day.

Natural gas requirements

In 2015, domestic demand was for 7.50 billion cubic feet per day. During that year, natural gas and LNG imports achieved 1.52 billion cubic feet per day, out of which 105.2 million corresponded to LNG. During 2016, 1.98 billion cubic feet per day were imported, out of which 50.6 million corresponded to LNG. As at March 2017, 2.09 billion cubic feet has been imported.

4. Are there specific government policies to encourage the exploration and production of unconventional gas or oil?

Government policy is to encourage private parties to engage in the exploration and production of unconventional gas or oil through awarding contracts for those fields. Unconventional resources have therefore been included in exploration and extraction bidding contracts, which are to be auctioned from 2015 to 2019.

Terms and conditions for exploration and extraction of unconventional resources, including royalties and payments, will be defined on the basis of the government contract plan (see Questions 8 and 11).

Regulation

Regulatory bodies

5. Who regulates the extraction of oil and gas?

Hydrocarbon activities, such as oil and gas, are regulated by the:

• Energy Ministry (SENER).
• National Hydrocarbon Commission (CNH).
• Energy Regulatory Commission (Comisin Reguladora de Energera) (CRE).
• National Agency of Industrial Safety and Environmental Protection of the Hydrocarbons Sector (Agencia de Seguridad, Energa y Ambiente) (ASEA).

Oil

The CNH is responsible for supervising and regulating oil activities by, among other things:

• Organising tender procedures to award contracts for the exploration and extraction of hydrocarbons (oil and gas).
• Managing and supervising contracts that have been awarded.

Supervision of health, safety and environmental protection derived from hydrocarbon activities is the responsibility of the National Agency of Industrial Safety and Environmental Protection of the Hydrocarbons Sector (Agencia de Seguridad, Energa y Ambiente) (ASEA). ASEA is a governmental body of the Environmental and Natural Resources Ministry (Secretara de Medio Ambiente y Recursos Naturales) (SEMARNAT).

In 2014, ASEA was created as a result of constitutional amendments approved in 2013. It was created, in particular, to:

• Monitor and ensure that all hydrocarbon activities are carried out under sustainability principles.
• Respond to and resolve an accident or emergency in the industry.

See box, The regulatory authorities.

Natural gas

Natural gas activities are supervised and regulated by the CRE and the National Centre for Natural Gas Control (Centro Nacional de Control del Gas Natural) (CENAGAS).

CRE is the regulatory government body that issues all permits related to gas activities. Additionally, it supervises and inspects compliance with laws, regulations, and Mexican official standards.

CENAGAS was created to manage, administer, and operate the National Natural Gas Transportation and Storage System and to ensure continuity and safety in the provision of natural gas throughout Mexico.

As with oil activities, the supervision of health, safety and environmental protection is the responsibility of ASEA (see above, Oil).

See box, The regulatory authorities.

The regulatory regime

6. What is the regulatory regime for onshore and offshore oil and gas exploration and production?

The following is the key legislation:

• Articles 25, 27 and 28 of Mexico's Federal Constitution.
• The Hydrocarbons Law and its Regulations, published in the Federal Official Gazette on 11 August 2014 and 31 October 2014.

These laws set out:

• The main rules allowing private individuals and companies to participate in and carry out exploration and production activities.
• The type of contractual arrangements that the Mexican Government, through the National Hydrocarbon Commission (CNH), can use for exploration and extraction contracts.
• Rules regarding midstream and downstream activities.

Additionally, the Hydrocarbons Revenue Law, published in the Federal Official Gazette on 11 August 2014, provides the tax regime for the different types of exploration and extraction contractual plans.

Rights to oil and gas

Ownership

7. How are rights to oil and gas held?

All underground hydrocarbons, including oil and gas, are government-owned property (Article 27, Mexico's Federal Constitution).Therefore, no private property in hydrocarbons is allowed.

However, Article 27 has been amended to permit private companies to participate in exploration and extraction activities (see Question 1, Domestic market structure). Ownership of extracted hydrocarbons is permitted in production sharing and licence contracts, in which part of the production is given to the contractor (see Question 8, Lease/licence/concession term).

Owners of land where underground hydrocarbons are discovered are entitled to remuneration from commercial production of the discovered wells. The Hydrocarbons Law provides that landowners receive a percentage of the contractor's profit (which is a minimum of 0.5% and a maximum of 3% for natural gas, and a minimum of 0.5% and a maximum of 2% for other resources). Negotiating the relevant percentage will be important for private companies that seek to engage in this industry.

Nature of oil and gas rights

8. What are the key features of the leases, licences or concessions which are issued under the regulatory regime?

Lease/licence/concession term

According to the hydrocarbons legal framework, rights to oil and gas depend on the contractual plan applicable to exploration and extraction activities. This can be one of the following:

• Share profit contract: the total production derived from the contract is delivered to a vendor who will sell the product. The profit resulting from the sale will be distributed between the government and contractor.
• Share production contract: a percentage of the production is given to a contractor. The contractor assumes all costs and risks related to the activities.
• Licence agreement: the government exclusively owns underground hydrocarbons until they are extracted from the subsoil and, after being extracted, they can be sold to private entities.

For a licence contract, the term established is 35 years, which can be extended two additional times, for a term of five or ten years. The National Hydrocarbon Commission (CNH) must have previously approved the extension period.

For a production sharing contract, the term is 30 years and can be extended for up to two additional times for periods of five years each.

Fees

Taxes and government fees vary, depending on the contractual plan for the exploration/extraction area. Fees are set forth in the Hydrocarbons Revenue Law.

Liability

According to the contract plan, contractor/private companies will be liable for:

• Performing all environmental obligations, commitments and conditions prescribed by the applicable laws, industry best practices, and environmental permits.
• Environmental damage caused by the contractor in carrying out petroleum activities.

Where the contractor is a consortium, each participating company that is part of the consortium is jointly and severally liable for the performance of every contractor's obligations under the contracts.

Restrictions

Restrictions provided in exploration/extraction contracts mainly relate to:

• The creation of liens or ownership restrictions on the rights arising from the contracts or materials (for example, when the contractor seeks to impose these liens as security for a debt).
• The contractor(s) selling, assigning, transferring, conveying or otherwise disposing of any rights (including participating interests) or obligations under the contract. To do this, the contractor(s) must obtain the prior written consent of CNH.
• Change of control in any member of the consortium without notice to CNH.

Additionally, according to bidding rules, no member may participate in a consortium other than those prequalified under the bidding process.

9. How are such leases, licences or concessions awarded?

Licence contracts are awarded in a bidding procedure called by the National Hydrocarbon Commission (CNH). The CNH determines the fees for the licence contracts, and bidders must comply with all legal, economic and technical requirements set out in CNH's bidding guidelines.

Transfer of rights

10. How are oil and gas rights transferred?

Transfer of rights

Rights related to underground hydrocarbons, such as oil and gas, cannot be transferred to any person as they are the property of the Mexican Government. The Mexican Government can, however, transfer or assign rights to extracted oil and gas, under an exploration/extraction contract granted through a tender procedure, depending on the type of contractual plan to be implemented (see Question 8).

Restrictions on transfer

To transfer or assign any rights or obligations from an exploration/extraction of hydrocarbons contract, the contractor must obtain the prior written consent of CNH (see Question 8, Restrictions). For those purposes, CNH will take into account, among other factors, the pre-qualification criteria established during the bidding procedures.

Tax

11. What payments are payable by oil and gas interest holders to the government?

For a bidder to be awarded a hydrocarbons contract, its economic offer must be the best offer within the bidders. The Mexican Government, through the National Hydrocarbons Council (CNH), determines minimum values for each type of contract scheme. If a bidder is awarded a contract, the bidder's economic offer will apply to the contract.

The relevant taxes, royalties, and other consideration are determined by a combination of the offer made in the bidding procedure, the rules set out in the Hydrocarbons Revenue Law, and the rules set out in bidding procedures. Finally, different fees and royalties apply, depending on the contract type, whether licence contract, production sharing contract, or profit sharing contract. The contractual rates cannot be modified as they form an integral part of the contract.

Licence contracts

The following apply:

• Contractual fee for the exploration phase. For the first 60 months (five years), this is MXN1,150 per square kilometre, and MXN2,750 after the first 60 months.
• Royalties. This is calculated by applying a formula to the contractual spot price of hydrocarbons. Each participant must provide an additional royalty value.
• Variable consideration. The minimum variable consideration is determined by the Finance Ministry. Bidders, when filing their economic proposals, offer a variable consideration. The consideration proposed by the successful bidder applies to the contract.
• Exploration and production activities tax. This is payable at MXN1,500 per square kilometre during exploration, and MXN6,000 per square kilometre during extraction.
• Duties for environmental protection. These can vary depending on the exploration and extraction scheme.
• Duties for supervision and administration of contracts. These are determined by the government.
• Adjustment mechanism. This is calculated according to a formula defined in the Rules of Bidding Procedures.
• Corporate Income Tax. This is payable at 30% of income.
• States and Municipalities Tax. This varies depending on the state and municipality.
• Employee's profit share. This is variable.
• Signature bonus. Under the Hydrocarbons Revenue Law, this bonus is determined by the Finance Ministry for each contract.

Production sharing contracts

The following apply:

• Corporate Income Tax. This is payable at 30% of income.
• Contractual fee for the exploration phase. For the first 60 months (five years), this is MXN1,150 per square kilometre, and MXN2,750 after the first 60 months.
• Exploration and production activities tax. This is payable at MXN1,500 per square kilometre during exploration, and MXN6,000 per square kilometre during extraction.
• Cost recovery limit. This relates to all related costs, expenses and investments included in the working programmes which can be recovered by a contractor under the contract and guidelines that will be issued by the Finance Ministry.
• Royalties. This is calculated by applying a formula to the contractual spot price of hydrocarbons.
• Variable consideration. The minimum variable consideration is determined by the Finance Ministry. Bidders, when filing their economic proposals, offer a variable consideration. The consideration proposed by the successful bidder applies to the contract.
• Duties for environmental protection. These can vary depending on the exploration and extraction scheme.
• Duties for supervision and administration of contracts. These are determined by the government.
• Adjustment mechanism. This is calculated according to a formula defined in the Rules of Bidding Procedures.
• States and Municipalities Tax. This varies depending on the state and municipality.
• Employee's profit share. This is variable.
• Government's production share. The CNH provides minimum values for the government's consideration in the operative profit; greater amounts can be agreed in the auction.

Profit sharing contracts

The same taxation/royalty rules as for production sharing contracts apply (see above, Production sharing contracts).

12. Does the government derive any other economic benefits from oil and gas exploration and production?

Apart from payments made to the government (see Question 11), economic benefits derive indirectly from investments that private companies with exploration/extraction contracts will make in the local states where they operate. Economic benefits also derive from the new infrastructure that will be built for midstream and downstream activities, mostly in connection with pipelines.

Under the energy legal framework, a minimum amount of national content is required for exploration/extraction activities to strengthen economic development. These minimum requirements are set by the Economy Ministry (SE).

13. What taxes and duties apply on import and export of oil and gas?

The following import duties apply, on an ad valorem basis (in proportion to the estimated values of the goods) to the following Harmonised Tariff Number (HTS) codes:

• Crude oils obtained from bituminous materials (2709): 7% on the two HTS codes identified in this subheading.
• Non-crude petroleum oils or bituminous minerals; preparations not specified or included elsewhere that contain petroleum oils, or where at least 70% by weight bituminous minerals in these oils form the base element; and oil waste (2710): between 5% and 7% on the 18 HTS codes identified.
• Petroleum gas and other gaseous hydrocarbons (2711): 7% on the ten HTS codes identified.

There are no applicable export duties.

Transportation by pipeline

14. What regulatory requirements apply to the construction and operation of oil and gas pipelines?

Before the 2013 Mexican energy reform, all gas and oil pipelines were owned and managed by the state-owned production company, PEMEX. Oil pipelines were owned and managed by PEMEX Refining prior to 2013. After the 2013 reform PEMEX Refining changed its name to PEMEX Industrial Transformation, and continues to control a vast network of distribution pipelines. Gas pipelines where owned and managed by PEMEX Gas and Basic Petrochemicals. After the 2013 energy reform, all gas pipelines were transferred to the National Centre for Natural Gas Control (CENAGAS).

Following the 2013 reform it is now possible for private individuals and companies to construct and operate pipelines. Federal, local, and municipal permits are required for the construction and operation of pipelines. Additionally, official Mexican standards setting pipelines requirements apply.

Some of the permits required by law to construct pipelines are:

• Construction permits, which are issued by the municipal authorities.
• Environmental permits which are issued by federal authorities, such as the Environmental and Natural Resources Ministry (SEMARNAT).
• Operating permits, which are issued by the federal authority, the Energy Regulatory Commission (CRE).

Prior to the construction of a pipeline in Mexico it is necessary to obtain surface rights over the area the pipeline will be built. In Mexico, a great part of the territory is deemed agrarian (ejido) land, which is subject to special laws and regulations. These lands are communal lands used for agriculture on which community members farm and maintain holdings.

To acquire surface rights over agrarian land certain requirements must be met. Typically, surface rights are secured by signing rights of way with landowners or by purchasing the land.

All fees derived from the transportation and/or distribution of gas or oil products are set and fixed by CRE and are set out in the relevant permits.

15. Is there a system of third party access to pipelines and other infrastructure?

There is a system of third party access regulated by the Energy Regulatory Commission (CRE). The CRE has issued specific regulations setting out obligations for permit holders of pipelines, to guarantee open access by third parties to natural gas or oil products.

Under these regulations, permit holders must provide services (such as transportation) to users under similar conditions whenever there is available capacity.

Health, safety and the environment

Health and safety

16. What is the health and safety regime for oil and gas exploration and extraction, and transportation by pipeline?

Regulation of exploration, extraction and transportation

The health and safety regime for exploration, extraction and transportation activities is basically the same. Companies engaged in these types of activities must comply with the following legislation:

• Environmental Protection and Ecologic Balance General Law and its Regulations.
• Hydrocarbons Law.
• Environmental Responsibility Federal Law and its Regulations.
• Hazardous Management and Prevention General Law.

The main purpose of these laws and regulations is to develop the hydrocarbons industry in a sustainable manner. Private companies are only just starting to invest in exploration and extraction activities (see Question 1, Domestic market structure). Prior to the energy reform of 2013, the state-owned oil company PEMEX, through its environmental protection division, implemented several programmes and issued specific internal regulations regarding environmental and industrial safety applicable to its midstream, downstream and upstream infrastructure. PEMEX infrastructure is, therefore, subject not only to the new regulations but also its internal rules.

One of the main requirements to participate in and pre-qualify for the tender procedures to award exploration and extraction contracts is to present documents evidencing experience in industrial safety and environmental protection for at least five years prior to the tender procedure. These requirements can vary depending on the tender procedure and the type of block to be tendered (for example, whether it relates to ultra-deep waters, shallow waters or offshore blocks).

Municipalities in Mexico, especially those in which hydrocarbon activities are executed as well as those in which underground pipelines have been constructed, have civil protection plans to respond to and attend accidents or other negative consequences derived from such activities.

Finally, legislation requires new pipelines to comply with Mexican official standards to guarantee safety and protection. Such standards include, among many other issues, the required materials and the underground depth in which they must be placed.

Regulatory authority

All matters related to safety and environmental in hydrocarbons activities are regulated by the Environmental and Natural Resources Ministry (SEMARNAT) through the recently created special agency, the National Agency of Industrial Safety and Environmental Protection of the Hydrocarbons Sector (ASEA). The ASEA Law, states that it has, among others, the obligation to prevent and attend emergency situations in the industry, as well as to issue regulations in connection with environmental and industrial protection.

Environmental impact assessments (EIAs)

17. Is an EIA required before extracting or processing onshore or offshore oil and gas?

Drilling perforations for exploration and extraction of hydrocarbons activities must previously obtain an EIA issued by the Environmental and Natural Resources Ministry (SEMARNAT) through the National Agency of Industrial Safety and Environmental Protection of the Hydrocarbons Sector (ASEA) (Environmental Protection and Ecologic Balance General Law and its Regulations in matters of environmental impact assessments (EIAs)). There are some exceptions to this, for example, the construction or installation of production platforms in marine zones.

To obtain the EIA, the applicant must have previously submitted a social impact assessment to the Energy Ministry (SENER) for approval.

EIAs can be completed in-house or through external agencies. The individual or company that prepared and signed the EIA will be considered to be responsible for it.

18. What are the different stages of the EIA?

The following are the main stages of the EIA:

• The applicant must prepare the EIA (through a technical study, blueprints, and so on).
• The applicant must submit the EIA to the National Agency of Industrial Safety and Environmental Protection of the Hydrocarbons Sector (ASEA) for its analysis.
• The ASEA can require additional information from the applicant. The ASEA's request must be made within a maximum of 50 days after the EIA was submitted.
• The ASEA must issue a resolution in response to the EIA within a maximum of 60 days after the EIA was submitted or the additional information provided. If a project is complex, however, ASEA can extend this deadline by up to 60 additional days.

Depending on the type of project to be executed, ASEA or any interested party may request that a public consultation be held concerning the project. The deadline for requesting the public consultation is ten days following the publication of the EIA. The main purpose of the consultation is for any person to suggest additional preventive or mitigation measures.

The procedure can therefore take up to 60 days, but can be delayed because the ASEA needs additional information, a public consultation is held, or the project being evaluated is complex.

ASEA's resolution can:

• Authorise execution of works or activities on the basis of the EIA application.
• Conditionally authorise the application by modifying the project or applying additional preventive or mitigating measures.
• Reject the EIA application.

Environmental permits

19. Is there a permit regime for environmental damage or emissions produced during the extraction or processing of oil and gas?

For environmental emissions from fixed sources within the oil and gas extraction and process industry, a Federal Environmental Sole Licence must be obtained from the Environmental and Natural Resources Ministry (SEMARNAT) through the National Agency of Industrial Safety and Environmental Protection of the Hydrocarbons Sector (ASEA). In addition, it is necessary to file an annual report with SEMARNAT concerning emissions generated during the previous calendar year.

There is a preventative regime for environmental damage. Prior to executing a project that causes a negative environmental impact, it is necessary to obtain an EIA (see Question 17). To control pollutants being emitted into the environment and therefore avoid causing any environmental damage, it is also necessary to obtain other authorisations, permits, and licences, such as:

• An Environmental Risk Study Proceeding.
• A Federal Environmental Sole Licence (see above).
• A Record as a Hazardous Waste Generator.
• A Hazardous Waste Handling Plan Approval.

Environmental concerns

20. Are there any specific government policies and/or incentives aimed at meeting the environmental concerns associated with the exploration and production of oil and gas?

Environmental protection was one of the main concerns to be addressed by the recent energy reform. All new projects to be developed in Mexico within the hydrocarbon sector must apply to the newly created regulatory body, the National Agency of Industrial Safety and Environmental Protection of the Hydrocarbons Sector (ASEA) (see Question 17). ASEA was created to:

• Include, in one same authority, responsibility for environmental protection and safety, which were previously enforced separately by the Environmental and Natural Resources Ministry (SEMARNAT) and the Ministry of Labour.
• Establish a specialised agency over the hydrocarbon sector that had been, in relation to environmental matters, under the jurisdiction of SEMARNAT and several other authorities.

Waste

21. What are the regulations on the disposal of waste products resulting from oil or gas extraction or processing?

The Mexican environmental legal framework is intended to prevent and mitigate any possible soil pollution resulting from the incorrect management of waste products. There are several rules that must be observed when disposing of waste products, especially waste with hazardous characteristics, such as waste resulting from the oil or gas extraction or processing industry:

• Waste products must be:

  • separated and identified;
  • registered in logbooks; and
  • handled, collected, transported and disposed of correctly and through authorised companies (companies that must deliver a collection, transport and final disposal manifest whenever wastes are collected, to the company generating the wastes).
• Companies generating wastes must register with the competent environmental authorities, which are:

  • the Environmental and Natural Resources Ministry (SEMARNAT) in regard to hazardous wastes; and
  • local environmental authorities regarding special handling, solid and urban wastes.

From the environmental point of view there are no taxes on waste disposal however, companies collecting waste charge for providing their services and local/municipal authorities charge governmental fees for the public waste collection service.

Flares and vents

22. Are flare and vent regulations in place?

The National Hydrocarbons Council (CNH) has issued technical regulations for the use of natural gas associated with exploration and extraction of hydrocarbons.

Decommissioning

23. What are the decommissioning obligations and liabilities that arise?

When decommissioning a site, the owner or possessor of the site must observe and comply with the conditions set out in an environmental authorisation obtained for the project, such as:

• An environmental impact authorisation for the closure stage.
• An environmental risk study approval and accident prevention plan (if any).
• Any other environmental authorisation obtained.

In addition, although it is not obligatory, it is advisable to file a notice with the relevant environmental authorities (the Environmental and Natural Resources Ministry (SEMARNAT), local environmental offices, and so on), informing them of the decommission of the site.

In relation to hazardous wastes, it is necessary to:

• File a closure notice with SEMARNAT informing it of the closedown of the facilities.
• Dispose properly of all remaining hazardous wastes.
• Properly document the disposal.

If a concession title to use national waters or a permit to discharge wastewater was obtained for productive activities purposes, the title can be cancelled or transferred to a third party.

In addition, exploration and extraction contracts include some provisions and clauses related to decommissioning obligations, which must be observed by contractors.

Sale and trade

24. How is trade in oil and gas usually completed?

Following the energy reform of 2013, from 1 April 2016, individuals and companies can import oil products to Mexico, which means that they will be able to sell their imported oil products to services stations. Additionally, from 1 January 2016, any person can apply for a permit to sell oil products to the general public. These oil products, as a result of the liberalisation of oil imports, can be either PEMEX (the state-owned oil company) products or private companies' products.

The Mexican energy reform is still in the implementation phase, however, and the sale of oil products is mostly and typically still done by PEMEX through its franchises (although there have been recently some other trade marks that have opened new service stations which are not PEMEX franchises), which are usually owned by private companies or individuals. These franchise owners purchase oil products, mainly gasoline, directly from PEMEX and subsequently sell PEMEX products to the general public through their service stations.

Gas is also purchased from PEMEX by means of first hand sales to gas distributors and suppliers that have a permit for such activities. Subsequently, these companies sell gas to final users with whom they have service agreements.

Oil and gas markets are still regulated by the government, through the Energy Regulatory Commission, which recently released a liberalisation price strategy for oil products that aims to set maximum prices for the public sale oil products in different regions of Mexico during 2017.

Supervision of the market is made jointly by the Energy Regulatory Commission (CRE), the Finance Ministry (SHCP) and the Protection Consumer Attorneys Office (PROFECO). Among other things, PROFECO is responsible for supervising service stations in order to verify that no infringements of the law and/or regulations have been committed.

25. Are oil and gas prices regulated?

The Mexican Finance Ministry (Secretara de Hacienda y Crdito Pblico) (SHCP) has historically determined oil prices, especially those of gasoline. Regarding gas prices, the maximum gas prices when distribution and/or transportation are made by pipelines are set by the Energy Regulatory Commission (CRE) under methodologies issued by the CRE.

However, as a result of the energy reform, from 1 January 2018 oil and gas prices will be determined under market conditions, and no longer regulated by the government.

Notwithstanding the above, on December 2016, the Energy Regulatory Commission presented a strategy to liberalise oil product prices under a gradual basis. This strategy aims to set maximum public selling prices during 2017. The strategy was prepared taking into consideration the different logistics and transportation prices set for different parts in Mexico.

Enforcement of regulation

26. What are the regulator's enforcement powers?

Orders

The environmental authorities can order the:

• Suspension of works.
• Temporary or permanent shut down of facilities.
• Temporary suspension of service supply.
• Seizure of substances, materials, equipment, and pipelines.
• Suspension or revocation of permits or licences.

Fines and penalties

Energy authorities can impose fines on permit holders that do not comply with the obligations in the applicable legal requirements concerning their activities. Before imposing fines, the authority must follow an administrative procedure set out in the Administrative Procedure Federal Law. Fines can be appealed in the judicial courts.

27. Is there a right of appeal against the regulator's decisions?

The regulator's decisions, such as fines or orders, can be appealed through a "review appeal" (Federal Procedure Administrative Law) (see Question 26). The appeal must be filed by the affected party within 15 days following notice given by the regulator of its resolution. The appeal must be resolved by a higher authority than the one that issued the resolution/decision.

Decisions in the tender procedures to award exploration/extraction of hydrocarbon contracts can be appealed through an "amparo appeal". These constitutional procedures allow a party to challenge a decision on the basis of a fundamental human right, such as the right to be heard. They are resolved by a federal judge.

Insurance

28. Are there any insurance requirements that must be met?

Pursuant to the terms set in the Hydrocarbons Law, exploration and extraction contracts must include insurance and guarantee provisions that must be met by contractor's prior signing such contracts whenever they are awarded.

Reform

29. Are there plans for changes to the legal and regulatory framework?

The entire regulatory framework has recently been changed as a result of the energy reform and its approval by Congress, and this reform is only now beginning to be applied (see Question 1). There are therefore currently no plans for changes to the legal or regulatory framework.

One upcoming issue that may affect the electricity sector is the eventual renegotiation the North American Free Trade Agreement. However, at present, there is still a lot of uncertainty regarding which sectors and industries will be more affected and how are they going to be impacted.

Another issue that could potentially affect and impact the electricity sector is the coming Presidential election of 2018 and its outcoming result. Due to the uncertain result, investments related to the electricity sector could slow down, especially for projects currently under development.

The regulatory authorities

Energy Ministry (Secretara de Energera) (SENER)

 Address. Insurgentes Sur No. 890 Colonia del Valle Delegacion Benito Juarez Zip Code 03100 Mexico City Mexico T [phone] E [e-mail] W www.gob.mx/sener

Main responsibilities. SENER's responsibilities are to:

• Select contractual areas to be auctioned in the tender procedures.
• Approve and issue the five-year term exploration and extraction bidding plan.
• Determine the contract scheme to be implemented for each contractual area to be auctioned.
• Issue permits related to the processing, refining, importation and exportation of hydrocarbons and oil products.
• Issue permits related to natural gas processing.

National Hydrocarbon Commission (Comisin Nacional de Hidrocarburos) (CNH)

 Address. Insurgentes Sur 1228 Colonia Tlacoquemecatl del Valle Delegacin Benito Jurez Zip code 03200 Mexico City Mexico T [phone] E [e-mail] W www.cnh.gob.mx/

Main responsibilities. CNH's main responsibilities are to:

• Organise the bidding procedures for the awarding of exploration and extraction contracts.
• Sign and manage exploration and extraction contracts with companies successful in the bidding procedures.
• Review technical information related to hydrocarbons onshore and offshore fields.
• Approve authorisations filed by the state-owned oil company PEMEX to farm out allocations awarded to PEMEX in Round Zero of the auctions.
• Provide technical support to the Energy Ministry (SENER) in matters related to hydrocarbons.
• Approve exploration and extraction plans.

Energy Regulatory Commission (Comisin Reguladora de Energa) (CRE)

 Address. Boulevard Adolfo Lopez Mateos No. 172 Colonia Merced Gmez Delegacion Benito Juarez Zip Code 03930 Mexico City Mexico T [phone] E [e-mail] W www.cre.gob.mx/

Main responsibilities. The CRE's main responsibilities are to:

• Regulate and issue permits related to transport, storage, distribution, compression, liquefaction, decompression, regasification, commercialisation and public selling of oil products, natural gas and petrochemicals.
• Determine the geographical zones for the distribution of natural gas through pipelines.
• Issue administrative regulations related to the terms and conditions under which the above activities will be provided by permit holders.

National Agency of Industrial Safety and Environmental Protection of the Hydrocarbons Sector (Agencia de Seguridad, Energa y Ambiente) (ASEA)

 Address. Melchor Ocampo No. 469 Colonia Nueva Anzures Delegacin Miguel Hidalgo Zip code 11590 Mexico City Mexico T [phone] E [e-mail] W www.asea.gob.mx

Main responsibilities. The ASEA's main responsibilities are to:

• Regulate and supervise industrial safety, operational security, dismantling of facilities, waste control and air emissions regarding all hydrocarbon activities.
• Supervise, inspect and verify activities related to the hydrocarbon industry.
• Prepare investigations to ascertain the cause of industrial, operative and environmental accidents.
• Issue, revoke or deny environmental permits required for hydrocarbon activities, among them, environmental impact and risk assessment, air emissions, hazardous waste generator.

National Energy Control Centre (Centro Nacional de Control de Energa) (CENACE)

 Address. Don Manuelito No. 32 Colonia Olivar de los Padres Delegacion Alvaro Obregon Zip Code 01780 Mexico City Mexico T [phone] W www.cenace.gob.mx / www.cenace.gob.mx/Contacto.aspx (contact)

Main responsibilities. CENACE is responsible for:

• Managing the national electric system and guaranteeing access to the national transmission network and distribution network.
• Expanding and modernising the national transmission network.
• Organising and preparing the electric action procedures for purchasing electric energy.
• Entering into agreements to provide electricity from the national electric system.

Online resources

Regulatory authority websites

W www.gob.mx/sener (maintained by the Energy Ministry (SENER)).

W www.gob.mx/sener/documentos/prospectivas-del-sector-energetico?idiom=es (this document contains plans for the energy industry in Mexico, including relevant data).

W www.gob.mx/sener/acciones-y-programas/plan-quinquenal-de-licitaciones-para-la-exploracion-y-extraccion-de-hidrocarburos-2015-2019-7652?idiom=es (this document is the main guideline used by the Energy Ministry to call for exploration and extraction rounds and tenders. It provides the blocks and areas to be auctioned in each round, as well as the resources that they contain).

W www.cre.gob.mx/inicio.aspx (maintained by the Energy Regulatory Commission (CRE)).

W www.cre.gob.mx/articulo.aspx?id=437 (this link, hosted by the CRE, contains texts of the laws and regulations referred to in this Q&A, in Spanish).

W www.cnh.gob.mx/ (maintained by the National Hydrocarbon Commission (CNH)).

W www.cenace.gob.mx/Index.aspx (maintained by the National Energy Control Centre (CENACE)).

W www.asea.gob.mx/ (maintained by The National Agency of Industrial Safety and Environmental Protection of the Hydrocarbons Sector (ASEA)).

Description. The regulatory authorities referred to in this Q&A maintain official websites that provide information on the sector. They do not provide English-language versions of applicable laws and regulations.

Federal Laws of Mexico

W www.diputados.gob.mx/LeyesBiblio/index.htm / www.diputados.gob.mx/LeyesBiblio/regley.htm

Description. This website contains the text of many of the Laws of Mexico, such as the Mexican Constitution. It is in Spanish.

Contributor profiles

Juan Carlos Serra, Partner

Basham, Ringe y Correa S.C.

 T [phone] E [e-mail] W www.basham.com.mx

Professional qualifications. Graduate, Universidad Nacional Autonoma de Mexico; Master's Degree, Georgetown University (Fulbright Scholarship). Postgraduate Degree in Corporate and Economic Law, Universidad Panamericana; Diploma Degree in Energy Law, Universidad Iberoamericana.

Areas of practice. Energy (Oil, Gas & Electricity); mining; infrastructure; joint ventures; mergers and acquisitions; investments.

Recent transactions

• Representing Asian conglomerate in the acquisition, lease, and importation of offshore oilrigs and vessels for providing services to Pemex.
• Representing and advising a national oil company in connection with round 1 public tender called by the CNH for exploration and extraction of hydrocarbons in shallow waters.
• Advising a major oil company on various midstream and downstream activities to be developed in Mexico pursuant to the new energy legal framework.
• Advising a major energy company in the pre-qualification process for the first electricity auction called in Mexico.

Languages. Spanish, English

Recognition in legal directories

• Recognised by Latin American Energy and Infrastructure Guide as a Leading Lawyer.
• Ranked in Chambers Latin America as a leading lawyer in Energy & Natural Resources, Mergers & Acquisitions and Real Estate practices.
• Recognised by Chambers Latin America 2015 as a leading lawyer in Corporate, Mergers & Acquisitions and Energy & Natural Resources practices.
• Recognised as Latin America's Leading lawyer in IFLR 1000 Energy and Infrastructure.
• Named World's Leading Lawyer in 2014 by Who's Who of Mining Lawyers, as well as Who's Who of Energy Lawyers in 2012, 2013, 2014 and 2015.

Jorge Eduardo Escobedo, Associate

Basham, Ringe y Correa S.C.