My colleague Julian Nihill has written an excellent summary of the implications of the Mexican legislature’s recent approval of reforms to Pemex, which is set forth below in its entirety.

Amid much political jockeying and posturing, particularly by the PRD, the party of the narrowly defeated leftist candidate for the Presidency, Andrés Manuel López Obrador, the Mexican Congress, on Tuesday, October 28, passed a series of bills aimed at reforming how Pemex conducts business.  The bills go to President Calderón for his signature.  Although President Calderón has expressed his approval of this legislation, and is likely to sign it, the reforms that he proposed in his original draft of the law have been significantly watered down, and, for U.S. companies interested in participating in drilling and exploration activities in México, the legislation is a disappointment.

 

The good news is that this law marks a move toward a more nimble, market-responsive and accountable Pemex, which may be able to entice much needed foreign drilling and exploration technology into México.  The bad news is that it does not go nearly far enough, and is still mired in the old politics of national sovereignty  that has dogged Pemex since its foundation.

 

The law authorizes Pemex to:

 

- Raise funds in the world market and to issue so called “citizens bonds”, both of which suggest an increasing transparency and willingness to respond to outside financial market process.  But Pemex is not permitted to issue equity interests, a step that was widely anticipated by investors and commentators alike.

 

- Enter into contracts for drilling and exploration which contain incentives for the contractors.  But the incentives fall far short of what was hoped for.  Contractors may have no rights whatsoever to the reserves, and they may not report any such interest on their balance sheets or for financing purposes.  All payments must be in cash, and such payments may not be calculated by reference to a percentage of production or to the value of the sales of hydrocarbons, their derivatives, or the profitability of the Pemex entity that is contracting for services.  Contractors may not be granted preferential purchase rights nor any other rights that could impact the price at which the hydrocarbons (or derivatives) will be sold to third parties.

 

- Include in their contracts clauses permitting contractual modification as a result of technological advances brought by the contracting party, variations in the cost of equipment used in the project, or by other factors which result in increased efficiencies in the project.  These provisions in Article 60 of the Law of Pemex, are all considered advances in the rules governing Pemex’s contractual flexibility, but even these are restricted.  What Article 60 gives, Article 61 takes away.  Article 61 limits additional compensation to those situations in which (i) Pemex obtains economies resulting from early completion of the project, (ii) Pemex benefits from new technologies brought by the contractor, and (iii) “other circumstances attributable to the contractor which redound to the benefit of Pemex… provided that they are not in the form of a percentage of sales or production of hydrocarbons.”

 

Many potential foreign technology and equipment partners will consider these potential limitations too restrictive to warrant the investment of their time, equipment and human resources into the volatile Mexican hydrocarbon market.  Others may see this as a crack in the doorway, in particular the provisions for cash bonuses for benefits to Pemex.  It is expected that bidding for service contracts will begin as early as January 2009, and it may well be that those contractors who are willing to bid a relatively conservative price with the possibility of a contractual bonus, may be the real winners under this legislation.

The U.S. Commercial Service has issued a new report on Mexico’s digital media sector, which sets forth possible opportunities for U.S. companies in triple-play, mobile and wireless, pay-TV, consumer electronics and video games, and internet and broadband services sectors.  The report also includes an informative section on obstacles to market entry, including Mexican import requirements for hardware and software products.

Following seven months of intense debate and surrounded by protesters gathered outside the Congress, Mexico’s Chamber of Deputies (Camara de Diputados) yesterday approved certain changes to Mexico’s energy law regime, according to a report in El Economista. The changes, which were approved by the Senate last week, must be signed by President Felipe Calderon before they will become law, but receipt of his imprimatur is all but certain.

Nearly all analysts agree that the amendments, which could have been a great opportunity for Mexico to enact expansive reform to its energy sector and root out inefficiencies at Pemex, are a major disappointment.

The following is a summary of a few of the significant aspects of the new energy law regime, as set forth in the report:

Laws Under Article 27 of the Constitution

• Blanket prohibition on private sector participation in strategic areas of the hidrocarbons sector, such as refining of oil and gas and construction of pipelines and storage plants.
• Allows Pemex to enter into contracts with private sector participants for projects or services provided Pemex does not grant any rights to such participants relating to ownership of hidrocarbons.
• Prohibits Pemex from entering into contracts with private sector participants that permit or require Pemex to share a percentage of production or the profits of Pemex or which include rights of preference or shared production (i.e., risk-sharing arrangements).
• Prohibits Pemex from agreeing to submit itself to the jurisdiction of foreign courts in project or services contracts performed in Mexico and entered into with foreign contracting parties, but allows Pemex to submit itself to the jurisdiction of arbitral tribunals pursuant to international agreements to which Mexico is a party.

Amendments to the Law of the Energy Regulatory Commission (Comision Reguladora de Energia - CRE)

• Grants the Energy Regulatory Commission (CRE) technical, operative, and management control over regulation of the gas and electricity sectors.
• Allows for the CRE’s participation in the generation and cogeneration of electricity through renewable energy sources, as well as the establishment of financing the same, including electricity generation by wind, solar, geothermal, and water sources.

Law for the Sustainable Exploitation of Energy (Ley para el Aprovechamiento Sustentable de la Energia)

• Provides for sanctions by fine for those who import, distribute, or sell electrial equipment or devices that provide false or incomplete information to consumers.
• Creates the National Program for the Sustainable Exploitation of Energy and the National Commission for Energy Efficiency.

Amendments to the Law of the National Hidrocarbons Commission (Ley de la Comision Nacional de Hidrocarburos)

• Approves the Law of the Energy Regulatory Commission (CRE), which expands and increases the regulatory and oversight activities of the CRE.

Law for the Exploitation of Renewable Energy

• Establishes the System of Energy Sustainability.

Pemex Law

• Prohibits the privatization of Pemex.

George Baker, the author of the Energia.com and a management consultant who advises companies in the oil and gas, power, and chemical industries, has commented extensively on Mexico’s recent energy reforms. 

His insightful comments regarding the Pemex Administration Act of 2008, which include the recent reforms to Mexico’s oil and gas laws, are available here.

President Felipe Calderon has signed into law a bill to ban the capture and export of Mexican wild parrots, according to a report by Defenders of Wildlife.

The report said that Mexico is home to 22 species of parrots and macaws, of which six are found nowhere else in the world, and that 90 pecent of Mexican parrots and macaws are in some manner at risk.

Mexico and China have entered into an agreement that obligates Mexico to repeal the antidumping duties assessed by Mexico on imports of certain Chinese goods by October 15, 2008 and on other Chinese goods by December 11, 2011. 

For goods on which Mexico must eliminate antidumping duties by December 11, 2011, the agreement allows Mexico to enact transitional measures to eliminate the duties over a four-year phase-in period.  The transitional measures apply to goods in the harmonized system numbers that include textiles, apparel, footwear, toys, bicycles, tools, chemical products, valves, and locks, among others.

We have been in contact with reputable Mexican customs attorneys who believe that the enactment of the transitional measures could be challenged by importers of Chinese goods to Mexico as unconstitutional through the filing an amparo proceeding against the Mexican Government.  If an importer were to win such a proceeding, the chief benefit would be that the importer would be required to pay only the general tariff corresponding to the imported goods, and not the antidumping phase-in duties, on all of its imports to Mexico of Chinese goods encompassed within the judgment issued in the proceeding.

A copy of the agreement, which was published in the Official Federal Daily on October 14, 2008, is available here.

Businesses seeking to export products to Mexico may be interested in the U.S. Commercial Services report entitled “Sending Samples to Mexico”, a copy of which is available here.

Baja California is home to more aerospace companies than any other Mexican state, according to a report in today’s El Financiero.

Honeywell, Delphi, Gulfstreat, Eaton, and GKN are among the major aerospace companies with facilities in Baja.  These companies develop and manufacture electronic control systems, fuselage components, radiators, turbines, compressors, and cables, and other aircraft components.

The undersecretary of economic development of Mexico’s Ministry of Economic Development (Secretaria de Desarrollo Economico - SEDECO), who was quoted in the report, said that Baja’s aerospace industry generated 27,000 jobs in 2007.  He added that Honeywell had recently established a Technology Research and Development Center in Baja.

Mexico will invest MX$8 billion (US$785 million) on expansion and improvements of the Port of Veracruz, according to a Bloomberg report today.  The government will commence accepting bids for the project in 2009.  The project includes the building of two container terminals that should open in 2010.  Veracruz is located on the eastern coast of Mexico on the Gulf of Mexico.

Arturo Sarukhan, Mexico’s Ambassador to the United States, will give the keynote speech at a half-day seminar to be held on September 10, 2008 in Washington, DC on “New Legal Developments of Doing Business in Mexico”.  The seminar is hosted by the District of Columbia Bar Association and those interested may register here.

In the photo, Ambassador Sarukhan is accompanied by his lovely wife, Mrs. Veronica Valencia de Sarkhan.