Energy: Oil & Gas 2022 Comparisons

As per the Mexican Constitution, the Mexican nation has inalienable and imprescriptible ownership of all subsoil hydrocarbons in Mexico. 

Pursuant to the constitutional energy reform of December 2013 and the implementing legislation that followed, private investment is allowed in the whole Mexican hydrocarbons sector. The exploration and production of hydrocarbons (upstream activities) are considered as strategic activities and the Mexican State may perform them exclusively by means of (i) entitlements (asignaciones) awarded directly to state productive enterprises or SPEs (empresas productivas del Estado); or (ii) exploration and production contracts or E&P contracts (contratos de exploración y extracción) awarded by public bidding process to SPEs and/or private entities. Such E&P contracts must include the constitutional principle that hydrocarbons while in the subsoil are the property of the Mexican nation, and once extracted, they may be owned by the contractor, depending on the type of E&P contract they hold. The contractor has the right to report, for accounting and financial purposes, the corresponding E&P contract and its expected benefits. All other activities of the hydrocarbon industry (midstream and downstream activities) may be carried out by SPEs or private entities (however, in all cases they must be Mexican commercial entities, which may have up to 100% foreign investment).

The Mexican hydrocarbons sector falls under federal jurisdiction. As such, the main government agencies involved in the regulation and supervision of the Mexican hydrocarbons sector are as follows.

• The Ministry of Energy (Secretaría de Energía or “SENER”) is both a policy maker and regulator of the Mexican hydrocarbons sector. It has, among others, the following responsibilities and duties –
1. to determine the public policy of the industry;
2. to ensure the adequate and efficient development of the hydrocarbons sector and co-ordinate the different regulators;
3. to award and revoke entitlements to SPEs, select the areas that may be subject to E&P contracts and establish the terms and conditions of said contracts;
4. to regulate, grant, supervise and revoke permits for the refining of petroleum, the processing of natural gas and the importation and exportation of hydrocarbons and refined oil products (petrolíferos, mainly gasoline and diesel); and
5. to plan for the expansion and optimisation of pipeline transportation and storage infrastructure.
• The National Hydrocarbons Commission (Comisión Nacional de Hidrocarburos or CNH) is the regulator of the upstream activities in the hydrocarbons sector. It has, among others, the following responsibilities and duties –
1. to manage and supervise the entitlements awarded to SPEs;
2. to bid, enter into, manage, supervise and terminate E&P contracts;
3. to authorise drilling of exploratory, deep water, ultra-deep water and design model wells;
4. to authorise superficial recognition and exploration; and
5. to collect, safeguard, use and manage information related to upstream activities.
• The Energy Regulatory Commission (Comisión Reguladora de Energía or CRE) is the regulator of midstream and downstream activities in the hydrocarbons sector. It has, among others, the following responsibilities and duties –
1. to regulate, grant, supervise and revoke permits for the transportation, storage, distribution, compression, liquefaction, decompression, regasification, commercialisation and retail sales of hydrocarbons, refined products and petrochemicals;
2. to regulate the vertical integration and cross-participation of permit-holders, and
3. to regulate the terms and conditions pursuant to which permit-holders provide their services, including consideration, prices and tariffs.
• The National Agency for Security, Energy and Environment (Agencia Nacional de Seguridad y Protección al Medio Ambiente del Sector de Hidrocarburos or “ASEA”) is the regulator for industrial safety, operational safety and environmental protection in the hydrocarbons sector, including activities related to decommissioning and abandonment, as well as the regulation of the design, construction, operation and maintenance of equipment, facilities and other infrastructure destined for the transportation, storage, distribution and retail sales of hydrocarbons, refined products and petrochemicals, among other responsibilities and duties.
• The Ministry of Economy (Secretaría de Economía or SE) is in charge of issuing national content regulations and supervising compliance with related obligations, as well as the methods for testing, sampling, verification and volume measurement of hydrocarbons.
• The National Agency for the Control of Natural Gas (Centro Nacional de Control de Gas Natural or “CENAGAS”) manages the National System of Natural Gas Transportation and Storage (Sistema de Transporte y Almacenamiento Nacional de Gas Natural) in order to ensure the supply of natural gas in Mexico, under open access and non-discriminatory conditions.

See 1.4 Principal Petroleum Law(s) and Regulations for the main legislation governing the powers and authorities of the above-mentioned government agencies in the Mexican hydrocarbons sector.

Depending on the subject matter of regulation, other entities may have some level of regulatory influence in the hydrocarbons sector. For example, the Ministry of Finance (Secretaria de Hacienda y Crédito Público or SHCP) is in charge of establishing the main economic conditions for E&P contracts, while the Mexican Federal Economic Competition Commission (Comisión Federal de Competencia Económica or COFECE) is in charge of determining the existence of effective competitive conditions in the midstream and downstream sectors in order to ensure the efficient development of competitive markets in these sectors.

State governments may regulate certain matters applicable to the hydrocarbons sector, such as the management of special handling waste (ie, non-hazardous) and/or the atmospheric emissions of the activities in question. While at the local level, municipalities issue regulations regarding the use and occupation of land, authorising, controlling or prohibiting said use for the development of activities as set forth in the applicable urban development programmes and ensuring that construction meets the applicable safety standards.

Petróleos Mexicanos (“PEMEX”) is Mexico’s national oil and gas company. Its corporate nature corresponds to an SPE (a government-owned entity with a commercial purpose), exclusively owned by the Mexican government, which is entitled to compete in the hydrocarbons sector like any other participant. 

PEMEX and other SPEs have a mandate to create economic value and profitability for the Mexican State. In relation to other public entities, PEMEX has technical, managerial and budgetary autonomy; furthermore, it is subject to special corporate governance (including relating to its subsidiaries and affiliates), compensation, procurement, administrative responsibilities, state dividends, budget and public debt regimes.

PEMEX’s primary purpose is upstream activities, as well as the commercialisation of hydrocarbons. It may also perform other midstream and downstream operations.

Pursuant to the constitutional energy reform of December 2013, legally and formally speaking, there is no longer a state monopoly in Mexico’s hydrocarbons sector and, in consequence, PEMEX and its subsidiaries no longer have regulating or operating authority and exclusivity. However, PEMEX continues to be the main player in Mexico’s hydrocarbons sector.

The main laws and regulations for the hydrocarbons sector are the following.

• Hydrocarbons Law (Ley de Hidrocarburos) – this is the principal legislation in Mexico’s hydrocarbons sector with the purpose of regulating the upstream, midstream and downstream activities in Mexican territory. The Hydrocarbons Law reaffirms the principle enshrined in the constitution that all subsoil hydrocarbons belong to the Mexican nation and its rights thereto may not be transferred or encumbered. According to the Hydrocarbons Law, the Mexican hydrocarbons sector is of public interest (utilidad pública) and said law provides for legal easements, or superficial occupation or the encumbrances necessary for the pursuit of activities related to such industry. Furthermore, upstream activities are of social benefit (interés social) and public order (orden público) and, as such, they have precedence over any other activity that uses or exploits the surface or subsoil of land designated to such activities.
• Hydrocarbons Revenue Law (Ley de Ingresos sobre Hidrocarburos) – the purpose of this law is to:
1. establish the regime of the Mexican State's revenues derived from upstream activities, as well as the considerations to be established in the E&P contracts;
2. regulate the administration and supervision of the financial aspects of the E&P contracts; and
3. monitor the obligations regarding transparency and accountability with respect to the resources.
• ASEA Law (Ley de la Agencia Nacional de Seguridad y Protección al Medio Ambiente del Sector de Hidrocarburos) – the purpose of this law is to create ASEA, which is responsible for protecting people, the environment and hydrocarbon sector facilities through regulatory and supervisory powers for the industrial safety and operational safety, decommissioning and abandonment of facilities, as well as the control of waste and polluting emissions.
• Hydrocarbons Law Regulation (Reglamento de la Ley de Hidrocarburos) – this regulation orders the upstream sector in Mexico, including, among others:
1. the process for the award, amendment, assignment and termination of entitlements;
2. the planning, bidding process and termination of E&P contracts;
3. the co-existence of entitlements and E&P contracts with mining licences;
4. the surface use and occupancy negotiations for upstream activities; and
5. the process to conduct the social impact evaluation and the prior consultation.
• Third Title of the Hydrocarbons Law Regulations (Reglamento de las Actividades a que se refiere el Título Tercero de la Ley de Hidrocarburos) – this regulation orders the permits necessary to carry out midstream and downstream activities in Mexico, including, among others:
1. the granting, modification, assignment and termination processes related to permits required to perform said activities;
2. the permit content, principal obligations of permit-holders, and criteria for the suspension of activities; and
3. the economic regulation, including the terms and conditions for the rendering of services and applicable considerations. 

The main regulatory bodies have issued numerous general administrative provisions which develop in detail various provisions contained in the corresponding secondary legislation and regulations. A more detailed list of the legal framework applicable to the hydrocarbon sector can be found in the following web pages:

• CNH Regulatory Framework;
• Legal Framework on Hydrocarbons; and
• How Are We Doing in Terms of Hydrocarbons?

In addition to hydrocarbon-related regulation, oil companies are subject to a wide range of regulations such as antitrust laws and financial regulations, among others.

As mentioned in 1.1 System of Petroleum Ownership, the exploration and production of hydrocarbons (upstream activities) are considered strategic activities reserved for the Mexican State, which carries out said activities either through entitlements to SPEs or E&P contracts awarded through a public bidding process to SPEs and/or private entities (these must be Mexican commercial entities, but may have up to 100% foreign investment).

As such, private entities are able to participate in upstream interests via four types of E&P contracts:

• licences;
• production-sharing contracts;
• profit-sharing contracts; and
• service contracts. 

As mentioned above, the contractor has the right to report in its financial statements, for accounting and financial purposes, the corresponding E&P contract and its expected benefits. E&P contracts are governed by Mexican federal law and are not, under any circumstances, subject to foreign law.

E&P contracts are awarded by means of a public bidding process conducted by the CNH. These bidding processes must be implemented under the principles of transparency, maximum publicity, equality, competitiveness and simplicity. 

Exceptionally, an E&P contract can be awarded directly (ie, without the need to conduct a public bid) to holders of coal-mining concessions exclusively for the exploration and production of natural gas (coal methane) contained in and produced by mineral carbon lodes.

The procedures to award E&P contracts are governed by the Hydrocarbons Law, which explicitly excludes the applicability of other public procurement laws in Mexico. The Hydrocarbons Law provides three possible mechanisms for the awarding of E&P contracts: (i) ascending auctions, (ii) descending auctions, or (iii) auctions for the first price in a sealed envelope. It also allows for the submission and analysis of proposals through electronic media.

The public bidding process for the award of an E&P contract begins with the bid call and ends with the award of the contract; both acts must be published in the Federal Official Gazette (Diario Oficial de la Federación). In general, the stages for these processes are the following:

• publication of the bid call and bidding guidelines;
• access to the data room;
• visits to the contractual areas;
• registration to the bidding process;
• clarification sessions;
• pre-qualification;
• submission and opening of bid proposals;
• the award of the E&P contract(s) and publication thereof; and
• execution of the E&P contract(s). 

There must be at least 90 calendar days between the publication of the bid call and the submission of the proposals.

Participants in the public bidding process must comply with the specific pre-qualification criteria set forth in the corresponding bidding guidelines (with respect to technical, financial and performance requirements, as well as the necessary experience) to be able to submit a bid proposal. Pursuant to the Hydrocarbons Revenue Law, the criteria to award E&P contracts has an economic nature, always with a view to maximising the Mexican State's income. Foreign participants must incorporate a Mexican entity to enter into an E&P contract.

The only mechanism by which to challenge the resolutions under which the relevant contract is awarded to the winner or the public tender is cancelled, is the indirect amparo lawsuit.

Pursuant to the Hydrocarbons Revenue Law, E&P contracts must provide for the following considerations.

License Agreements

The following considerations have to be paid by the contractor in favour of the Mexican State:

• a signing bonus – the amount of which will be determined by the SHCP;
• a contractual fee for the exploration phase – a monthly payment from the signing of the E&P contract until commercial production begins, with the amounts being updated on an annual basis – of:
1. MXN1,458 per km² during the first 60 months of the contract period; and
2. MXN3,487 per km² from the 61st month onwards;
• royalties – a percentage applied to the contractual value of production (there are differentiated rates for the different types of hydrocarbon and the contractual price thereof); and
• a percentage of the contractual value of production – a fixed rate established in the corresponding E&P contract that is subject to adjustment in favour of the Mexican State – in case of extraordinary profitability.

The consideration in favour of the contractor will consist of the transfer of title to the hydrocarbons produced at the wellhead.

Production-Sharing Contracts and Profit-Sharing Contracts

The following considerations have to be paid by the contractor in favour of the Mexican State:

• a contractual fee for the exploration phase (please see License Agreement subsection above);
• royalties (please see License Agreement subsection above); and
• a percentage of the operating profit – the profit is determined periodically, decreasing from the contractual value of the production, the amount of royalties and recovery costs.

The contractor will be entitled to recover costs and to the remainder of the operating profit. 

Service Contracts

Under these agreements, the contractor must deliver the entire production to the Mexican State and payment of consideration to the contractor must always be in cash. 

The Mexican State receives income from upstream activities from:

• the considerations in favour of the Mexican State established in the E&P contracts (see 2.3 Typical Fiscal Terms Under Upstream Licences/Leases) or the government fees applicable to the entitlements awarded to SPEs;
• the income tax (impuesto sobre la renta) payable by the SPEs holding entitlements and the contractors of E&P contracts (corporate income tax is 30%); and
• a special tax for upstream activities (impuesto por la actividad de exploración y extracción de hidrocarburos).

With regard to upstream activities, contractors must apply the following percentages of deductions for the purposes of income tax:

• 100% of the investments related to exploration, secondary and enhanced recovery, and non-capitalisable maintenance;
• 25% of the investments related to the development and production of hydrocarbon fields; and
• 10% of the investments related to storage and transportation facilities necessary for the performance of the E&P contracts.

The above-mentioned special tax for upstream activities consists of MXN2,798 per km² of the contractual area during the exploration phase and MXN11,190 per km² during the production phase. Said amounts are updated on a yearly basis.

In addition to the above, SPEs and contractors must also pay:

• the corresponding value added tax or VAT (impuesto al valor agregado) on the procurement or importation of goods or services, as well as the usage of goods (provided that VAT for transactions strictly related to upstream operations is 0%, while all other transactions are subject to the general rate of 16%); and
• the applicable government fees to the CNH and ASEA for the management and supervision, as applicable, of E&P contracts. 

PEMEX and other SPEs are able to participate in upstream interests via (i) entitlements directly awarded by SENER, or (ii) E&P contracts awarded by the CNH through a public bidding process.

In order to award an entitlement to PEMEX or another SPE, SENER must provide evidence that:

• granting such entitlement is in the best interest of the Mexican nation; and
• PEMEX or the relevant SPE has the technical, financial and executive capabilities required to produce hydrocarbons efficiently. 

Entitlements must include, among other information, the area being awarded, the terms and conditions applicable to the upstream activities to be conducted and a minimum national content percentage. PEMEX may only assign the rights and obligations under its entitlements to SPEs, with prior approval from SENER.

PEMEX will be treated on an equal footing with respect to other competitors that decide to participate in an E&P contract bidding process. However, there are specific cases in which the Mexican State may (through PEMEX or another SPE) have a special participation in E&P contracts:

• the contract area tendered co-exists, at different depths, with the area of an entitlement;
• there are opportunities to promote the transfer of knowledge and technology for capacity-building of PEMEX or other SPEs (the state’s participation may not exceed 30% of the investment of the project);
• the projects are being promoted by a special purpose vehicle (SPV) of the Mexican State (the vehicle’s participation may not exceed 30% of the investment); and
• when the contractual area is part of a trans-boundary reservoir (the state’s participation must be at least 20% of the investment).

Exploration and production activities must have an average national content of at least 35% by the year 2025. Such requirement does not apply to upstream operations in deep and ultra-deep waters (in such cases, national content can be as low as 0%).

The national content obligations will be determined by the CNH and will be included in the bidding guidelines for E&P contracts. The Ministry of Economy will be in charge of issuing the methodology for measuring national content, as well as the monitoring of compliance with national content obligations. Failure to meet the national content obligations normally results in liquidated damages under the respective E&P contract.

In order to proceed to the development and production of a commercial discovery, the contractor of an E&P contract must have a development plan (plan de desarrollo) approved by the CNH. This development plan must include, among other things, a production plan that maximises the recovery factor under economically viable conditions, as well as measuring mechanisms to be implemented during the production of hydrocarbons.

The CNH must, within 120 calendar days of receiving all the documentation, approve, comment or deny the development plan. If the CNH does not issue a resolution within such term, the development plan will be deemed approved.

All E&P contracts must, at least, include clauses related to:

• the delimitation of the contractual area;
• the exploration and production development plans;
• the work and investment programme (when applicable);
• the contractors’ obligations;
• the term and conditions for its extension;
• the grounds for termination;
• the dispute resolution mechanisms;
• the applicable penalties in case of default; and
• an acknowledgement that subsoil hydrocarbons are the property of the nation.

The Mexican State, through the CNH, may unilaterally terminate E&P contracts by means of an administrative rescission. However, valid grounds for rescission are limited to:

• unjustified suspension of the exploration and production activities;
• unjustified failure to comply with the minimum work programme;
• unauthorised, partial or total, transfer of the operation or the rights conferred by the E&P contract;
• a serious accident caused by the contractor’s misconduct or negligence which results in damage to facilities, death and loss of production;
• providing deceitful information on more than one occasion to the relevant authorities;
• failure to comply with a final resolution of any federal court; and
• unjustified failure to make any payment or deliver hydrocarbons to the state under the terms established in the E&P contract.

In addition, the E&P contract will provide the causes for contractual rescission.

E&P contracts are governed by Mexican federal law and may not, under any circumstances, be subject to foreign law. Alternative dispute resolution mechanisms – such as arbitration – may be agreed by the parties (as long as the proceedings are in Spanish and the award is strictly within the law) to solve disputes relating to E&P contracts, with the exception of disputes related to administrative rescission.

Some other key terms of E&P contracts include the following.

• All technical information resulting from upstream activities (including geological, geophysical, petro-physical and petrochemical information) belongs to the Mexican State. However, the contractor performing such activities has the right to commercially benefit from this information.

• Most E&P contracts awarded to date include the following phases, which may co-exist during the term of the E&P contract:

1. an exploration phase under which the work commitments (compromisos/unidades de trabajo) will be performed (failure to meet the work commitments results in liquidation damage);
2. an evaluation phase following a discovery; and
3. a development/production phase following a commercial discovery. 
• Companies participating under a consortium or partnership will be jointly and severally liable under the corresponding E&P contract.
• As a result of the termination of an E&P contract for any cause, the contractor will transfer to the Mexican State – without any charge, payment or compensation whatsoever – the corresponding contractual area and the goods and assets used in the performance of the contract.

The requirements for the transfer (assignment or sale) of (i) interests under E&P contracts, (ii) the corporate or managerial control of a contractor, or (iii) the control of operations of a contractual area, are as follows.

Prior Written Consent from CNH

The acquiring entity shall, among other things: (i) fulfil the respective pre-qualification criteria that the contractor evidenced during the bidding process; and (ii) accept to be jointly and severally liable for the fulfilment of all obligations and liabilities arising from the respective E&P contract (regardless of when they were generated).

Notification of COFECE

The filing of a notice with COFECE is required if the transaction exceeds at least one of the following statutory thresholds (regardless of whether such transaction presents an antitrust concern or not):

• if the consideration for the Mexican portion of the transaction exceeds 18 million Unidad de Medida y Actualización (UMA) (approximately MXN1,732 million);
• in the event of the acquisition of 35% or more of the total assets or capital stock of an entity whose total assets or sales in Mexico exceed 18 million UMAs (approximately MXN1,732 million); and
• in the event of the acquisition in Mexico of assets or capital stock in excess of 8.4 million UMAs (approximately MXN808 million), provided that the joint assets or annual sales in Mexico of the entity equal 48 million UMAs (approximately MXN4,618 million) or more.

In the event of the transfer of the E&P contracts (as opposed to the transfer of stock) the permits related to the operation must be assigned to the new contractor. If the assignment of some of the permits requires prior approval from the respective authority (ie, ASEA) or if some cannot be assigned as a matter of law, transitory arrangements may need to be put in place in order to continue with the operations of the contractual area.

There are no legal or regulatory restrictions on production rates currently in place. 

As mentioned in 1.1 System of Petroleum Ownership, private entities may participate in Mexico’s midstream and downstream sectors. Pursuant to the Hydrocarbons Law, midstream and downstream activities are subject to obtaining a permit from either SENER or the CRE (see 1.2 Regulatory Bodies). There has been no state monopoly in these sectors since December 2013.

Midstream and downstream activities are considered of public interest and public order. If the permit-holder defaults on its obligations under the respective permit, the CRE or SENER (as the case may be) may:

• cancel the permit;
• temporarily take over the assets, rights and/or facilities required for the adequate implementation of the permitted activity; or
• intervene in the implementation of the permitted activity. 

SENER’s and the CRE’s right to suspend the permits in case of imminent danger to national security, energy security or national economy is currently suspended due to the challenges to certain amendments to the Hydrocarbons Law from May 2021.

Permit-holders must refrain from providing services (i) to third parties that require a permit (in terms of the Hydrocarbons Law) and do not have it, and (ii) with respect to hydrocarbons of illicit origin.

The state monopoly in Mexico’s midstream and downstream sector came to an end with the constitutional energy reform of December 2013.

See 3.10 Rules for Third-Party Access to Infrastructure with regard to open-access provisions for the National System of Natural Gas Transportation and Storage operated and managed by CENAGAS.

As mentioned previously, midstream and downstream activities are subject to obtaining a permit from either SENER or the CRE (see 1.1 System of Petroleum Ownership, 1.2 Regulatory Bodies and 3.1 Forms of Allowed Private Investment in Midstream/Downstream Operations). As per the Hydrocarbons Law, the interested party must file a permit request with the relevant government agency stating, among other things:

• its general information;
• the activity to be executed;
• the technical specifications for the project;
• the social impact evaluation (evaluación de impacto social) identifying any indigenous communities that may be affected by the project; and

• the insurance required by the competent authority (if applicable). 

The requesting entity must also provide evidence that its facilities and equipment are designed in accordance with the relevant legal provisions and the industry’s best practices. 

Depending on the specific activity, such permits can be requested either electronically and/or at the central offices of SENER or the CRE, as applicable. In general, the process to have the permit granted involves the following steps:

• obtaining pre-registration and user certification from the relevant agency (ie, submitting articles of incorporation and registering a legal representative);
• payment of the corresponding fees for processing the application;
• the interested entity's filing of a permit request in the forms approved for such purposes by the relevant government entity;
• once the permit request has been filed, SENER or the CRE, as applicable, will have ten business days to ask the petitioner for any missing information (if the government agency does not ask for additional information, the permit request will be deemed admitted); and
• once the request has been admitted, SENER or the CRE, as applicable, will have 90 business days to issue its resolution granting or denying the permit.

Where SENER or the CRE denies the permit, the petitioner can either (i) submit a new permit request fulfilling all the requirements, or (ii) submit a revision appeal within the term of 15 business days.

In general, the typical commercial arrangement for midstream and downstream operations would be a service agreement between the permit-holder and its user (another permit-holder) or final user (the entity that uses the product). 

Except for services subject to open-access provisions (see 3.10 Rules for Third-Party Access to Infrastructure), both service agreements and the terms and conditions for the rendering of the services are regulated and approved by the CRE. The parties to service contracts for other midstream and downstream activities are free to negotiate and agree on the specific terms and conditions thereto (unless COFECE determines a lack of market competition, in which case, the granting authority may approve the form of services agreement).

Price Regulation

Except for retail sales of LPG, gasoline and diesel (the prices of which are set as per market conditions), midstream and downstream activities are subject to price regulation by the CRE. This regulation is subject to the following principles.

• Such price regulation will be applicable at all times unless COFECE has determined that there are real competition conditions for the relevant regulated-price activity, in which case, the prices will be set by market conditions.
• The consideration, prices and tariffs of services will be established by taking into account (i) the respective taxes, and (ii) the methodology established by the CRE based on an efficient cost estimate and a reasonable profit (the CRE has not apparently issued such methodology as yet).
• Price regulation will allow efficient development of the industry and competitive markets, reflecting the best practices for investments and operations, as well as protecting the respective users.
• The consideration, prices and tariffs authorised by the CRE should promote rational demand and use of the services.

The consideration, prices and tariffs authorised by the CRE are maximums and, consequently, permit-holders may agree on discounts or other agreements (as long as said discounts or agreements are general and not discriminatory).

Midstream and downstream activities are subject to:

• income tax – corporate income tax is 30%, while general deductions from the Income Tax Law (Ley del Impuesto Sobre la Renta) apply;
• VAT (see 2.4 Income or Profits Tax Regime Applicable to Upstream Operations) – the general VAT rate is 16%, although a 0% rate may apply to certain transactions, such as the export of goods); and
• the applicable government fees to be paid to the CRE and ASEA for the management and supervision, as applicable, of corresponding permits.

In addition, certain midstream and downstream activities may be subject to an excise tax (impuesto especial sobre producción y servicios) applicable to transactions related to sales or importation of goods and delivery of services. The tax rate depends on the product in question. The SHCP publishes the IEPS tax rate applicable for different types of fuels.

As mentioned in 3.1 Forms of Allowed Private Investment in Midstream/Downstream Operations, midstream and downstream activities are considered of public interest and public order and, in certain cases, the permit granting authority may temporarily take over the assets, rights and/or facilities required for the adequate fulfilment of the permitted activity, or intervene in the implementation of said activity. In such scenarios, SENER or the CRE, as applicable, may contract PEMEX, its subsidiaries and/or affiliates in order to guarantee the continuity of the permitted activity.

Furthermore, the Mexican State may provide non-commercial assistance to PEMEX, its subsidiaries and/or affiliates for the purpose of undertaking projects mandated by the federal government that have social implications and to promote economic development.

SENER may instruct (subject to the favourable opinion of the Ministry of Finance and, if applicable, the CRE) PEMEX or other SPEs to develop certain projects necessary for the adequate supply of energy in the national territory. These projects may include:

• refining of oil and processing of natural gas;
• transport and storage of hydrocarbons or other refined products;
• petrochemical pipeline transportation and storage;
• distribution of natural gas or other refined products; and
• sale to the general public of natural gas or other refined products. 

These projects will be financed with public resources and the investment mechanism will be at market prices. With the exclusion of upstream activities, these projects may also be implemented through public-private-partnership mechanisms.

Permit-holders must give preference to Mexican goods and domestic services (providing the same price, quality and timely delivery can be met) – including the training and hiring, at technical and directive level, of Mexican nationals.

The following are some of the key terms of midstream and downstream permits:

• in general, the term of said permits is 30 years, extendable for one additional period of 15 years;
• permits normally include a change-in-control provision requiring prior written consent from the CRE or SENER (transfers that do not result in a change of control need only serve notice to the CRE or SENER, as applicable);
• permit-holders are subject to certain self-regulating documents (which vary depending on the activity and are considered part of the permit);
• see 3.1 Forms of Allowed Private Investment in Midstream/Downstream Operations in relation to the obligation to refrain from providing services in certain cases;
• see 3.1 Forms of Allowed Private Investment in Midstream/Downstream Operations in relation to the cancellation, take-over and intervention powers of the CRE and SENER;
• see 3.4 Typical Fiscal Terms and Commercial Arrangements for Midstream/Downstream Operations in relation to price regulation; and
• see 3.10 Rules for Third-Party Access to Infrastructure in relation to open-access obligations.

The Hydrocarbons Law provides for negotiation and agreement between holders of pipeline transportation of hydrocarbons and refined products permits, on the one hand, and landowners, title-holders or beneficiaries of rights or assets on the other hand, of the consideration, as well as for the terms and conditions for the use or encumbrance thereof.

See 6.3 Energy Transition Considerations for the main terms and conditions of such negotiations. 

As a general rule, pipeline transportation, pipeline distribution and storage services to third parties are subject to open-access and non-discriminatory conditions (self-use pipelines and terminals are excluded from the open-access obligation). Under open-access and non-discriminatory conditions, the rendering of services to third parties is subject to available capacity, technical and economic feasibility, and the execution of the applicable service agreement. 

Under a non-discriminatory open-access obligation, the permit-holder may only refuse to provide its service if there is no available capacity in its system. If the corresponding system has available capacity (whether said capacity has not yet been allocated or is not being used), the permit-holder must make such capacity available either through an open season (on a firm basis) or through the electronic bulletin of the CRE (on a non-continuous basis).

To ensure effective, open access to the aforementioned infrastructure, users who fail to use their reserved capacity must make said capacity available, either through the permit-holder or through the secondary market.

The sale of hydrocarbons, refined products and petrochemicals requires a prior permit (either for commercialisation or for retail sale) from the CRE. Permit-holders must refrain from selling products of illicit origin; in order to prove the legal origin of the products, it is necessary to trace them in accordance with the administrative provisions issued for such purpose by the CRE.

See 3.4 Typical Fiscal Terms and Commercial Arrangements for Midstream/Downstream Operations in relation to price regulation. As of this date, the CRE has not issued any price regulation for commercialisation of hydrocarbons or petrochemicals.

Cross-Participation (Limitation on Concurrent Ownership)

Pursuant to the Hydrocarbons Law, there is cross-participation when:

• a person (directly or indirectly) participates in the capital structure and controls both –
1. a final user, a producer or a trader/retailer that uses pipeline transportation and/or storage services is subject to open access; and
2. a permit-holder for pipeline transportation and/or storage services is subject to open access; and
• both the above permits are issued to entities or individuals which belong to the same economic interest group.

Said cross-participation needs to be authorised by the CRE, with prior favourable opinion from COFECE. Depending on the case at hand, cross-participation between related activities may require, among other things, structural separation between the relevant companies in the economic interest group, so that operations and decisions can take place independently and cross-directives can be avoided.

According to the "Agreement that establishes the goods the importation and exportation of which are subject to regulation by the Ministry of Energy" (Acuerdo que establece las mercancías cuya importación y exportación está sujeta a regulación por parte de la Secretaría de Energía or the “Resolution”) the following products require a permit from SENER for their importation or exportation: (i) crude oils; (ii) gasoline, diesel oil (gas oil) and mixtures of these; (iii) fuel oil; (iv) turbosine, kerosene (lamp oil) and mixtures of these; and (v) butane and propane mixed together. In addition, a permit is required for the exportation of natural gas (no permit is required for its importation). An import permit is required for certain other products such as butane, propane, ethylene and propylene, among others (no export permit is required in such cases).

These permits may be granted for one year or five years.

The principal laws and regulations governing the exportation of hydrocarbons and refined products are:

• the Hydrocarbons Law;
• the Customs Law (Ley Aduanera);
• the Foreign Trade Law (Ley de Comercio Exterior); and
• the above-mentioned Resolution.

Permits may only be assigned with the prior authorisation of the granting authority, that is either SENER or the CRE, as applicable, as long as the holder thereof has complied with all its obligations and the purported assignee meets all the necessary requirements to hold a permit of that nature. 

Foreign investment is allowed in the entire Mexican hydrocarbons sector (ie, up to 100% foreign investment), provided that E&P contracts are signed by, and midstream and downstream permits are granted to, commercial entities incorporated according to the laws of Mexico.

There are no activities of the hydrocarbons sector reserved for Mexican nationals or Mexican entities that exclude foreign equity holders.

There are no sanctions currently in place with respect to investing in hydrocarbon assets in certain foreign jurisdictions or conducting business in the hydrocarbons sector with certain foreign counterparties or governments or in certain foreign jurisdictions.

Mexican environmental legislation is very robust and becoming increasingly so, with strong regulatory agencies that have well-defined jurisdiction over activities that may affect the environment.

The main environmental laws and regulations for the hydrocarbons sector are as follows.

• The ASEA Law (see 1.4 Principal Petroleum Law(s) and Regulations).
• The General Law on Ecological Balance and Environmental Protection (Ley General del Equilibrio Ecológico y la Protección al Ambiente), which provides the framework for most of the environmental policy instruments and environmental aspects that are not regulated under the ASEA Law, such as ecological territorial planning, natural protected areas, and ambient air emissions from stationary sources, among others.
• The General Law on Sustainable Forestry Development (Ley General de Desarrollo Forestal Sustentable), which oversees the exploitation of forestry vegetation and land. If hydrocarbons sector activities are developed on surfaces covered by forestry vegetation, then securing a change in the use of forestry land authorisation – an obligation set forth by this law – will be mandatory.
• The National Waters Law (Ley de Aguas Nacionales) – this oversees the use, exploitation, consumption and conservation of national waters, the discharge of wastewater into national waters or property (ie, rivers, the sea, the ground) and the use and occupation of federal zones next to bodies of water. Permits deriving from this law applicable to upstream, midstream and downstream activities include, among others:
1. concessions for the use of national waters;
2. wastewater discharge permits into national areas;
3. concessions to occupy a federal riverbank zone; and
4. permits for hydraulic and other works affecting riverbanks or bodies of water.
• The General Law for the Prevention and Comprehensive Management of Waste (Ley General para la Prevención y Gestión Integral de los Residuos), which sets forth the classification of waste (ie, hazardous, special management and urban) and provides the rules to manage waste in a safe and sustainable manner. It also oversees soil contamination and remediation procedures, as well as the rules for the import and export of hazardous wastes.
• The National Goods Law (Ley General de Bienes Nacionales) – this governs the use and exploitation of national property (ie, beaches, land, islands, etc). Where a petroleum project requires occupation of a federal maritime zone (ie, the first 20 metres of land after the highest tide mark), a concession will be required.

• The Federal Environmental Responsibility Law (Ley Federal de Responsabilidad Ambiental), which sets out the judicial process and liability framework to restore environmental damage, when unduly caused (ie, without proper authorisation and mitigation measures) and the economic penalties thereof. In addition, it provides legal standing for affected communities and civil organisations to seek damage redress before the courts.

The main government agencies involved in the regulation and supervision of the Mexican hydrocarbons sector are as follows.

• ASEA (see 1.2 Regulatory Bodies).
• The Ministry of Environment and Natural Resources (Secretaría de Medio Ambiente y Recursos Naturales), which is the government entity in charge of regulating environmental aspects that are not the responsibility of ASEA, such as the construction, development, operation, maintenance and abandonment of projects in Mexico.
• The National Water Commission (Comisión Nacional del Agua) – this regulates and manages all aspects relating to the use of national waters in the country, including public assets affected and wastewater discharge.
• The Federal General Attorney for Environmental Protection (Procuraduría Federal de Protección al Ambiente) has the capacity to carry out inspections, enforce the law and prosecute offenders who do not comply with applicable environmental legislation.

At the local level, environmental legislation enforcement varies from state to state. Although the general perception is that local enforcement is more lax than it is at the federal level, given the lower funding and the competition between states to attract investment, this does not mean that state environmental laws are not enforced at all. 

The foregoing is replicated at the municipal level, with wealthy urban municipalities ensuring compliance with municipal environmental laws and ordinances (particularly regarding urban development, as this provides considerable revenue) and poorer, rural municipalities not having – at times – the means to have personnel to oversee environmental issues.

The main environmental obligations that must be satisfied before commencing a major petroleum project are the following.

• Approval by ASEA of an environmental impact authorisation (autorización de impacto ambiental) and prior filing of an environmental baseline risk study (estudio línea base de riesgo ambiental) before said agency, prior to the commencement of site preparation and construction activities. In certain cases, a public consultation with members of the community may be required prior to the issuance of said authorisation.
• Approval by ASEA of the industrial safety, operational and environmental protection system (sistema de administración de seguridad industrial, seguridad operativa y protección al medio ambiente or “SASISOPA”) prior to the commencement of the corresponding construction activities.
• In the event of removal of forestry vegetation, approval by ASEA of a forestry land use change authorisation (autorización de cambio de uso de suelo forestal) and prior technical input by members of the state forestry council based on a technical study (estudio técnico justificativo).
• Approval by SENER of the social impact evaluation (evaluación de impacto social) identifying any indigenous communities that may be affected by the corresponding project in order to determine whether an indigenous consultation is required or not.

Other permits, licences or authorisations from different authorities that may be required prior to the construction of a petroleum project, include, among others: 

• a release letter in the case of archaeological and historical sites, issued by the National Anthropology and History Institute (Instituto Nacional de Antropoloía e Historia);
• crossing permits for –
1. federal highways (ie, by pipelines), issued by the Ministry of Infrastructure Transportation and Communications (Secretaría de Infraestructura, Comunicaciones y Transportes or SICT);
2. PEMEX infrastructure, issued by PEMEX; and
3. electric energy transmission lines, issued by the CFE;
• environmental impact authorisation for the construction of access roads, issued by the applicable State Environmental Ministry;
• a use-of-land licence, issued by the applicable municipality;
• a construction licence, issued by the applicable municipality; and
• civil protection approval, issued by the applicable municipality.

In Mexico, liability for onshore or offshore contamination may be of an administrative, civil or criminal nature and arises mainly for violations of the law, for the generation of contamination, for damages to third parties, or for the ownership or possession of contaminated sites. The main administrative liability from site contamination is remediation (so that the presence of contaminants at the site is contained and/or eliminated to the point where the site complies with applicable regulations). From a civil perspective, the person responsible for site contamination must repair for the owner all the damage suffered by the property.

Some offshore development requires an authorisation from SICT. This includes construction of the works, the dredging required for the construction, and occupation of the seabed.

E&P contractors and developers of offshore projects must (i) comply with the obligations set forth in the corresponding SASISOPA approved by ASEA, and must (ii) register the insurance policies for civil liability, environmental damage liability and/or well control liability, as the case may be, before ASEA.

Some offshore areas are considered Natural Protected Areas (NPAs), while others have stringent-use regulations, which limit the industrial and/or commercial activities that may be carried out there, through Marine Ecological Planning Programmes (MEPPs). Where applicable, offshore projects must comply with said NPAs and/or MEPPs.

The main requirements for the decommissioning (cierre, desmantelamiento y abandono) of upstream operations are the following.

• Prior to the commencement of commercial development activities, E&P contractors must establish a decommissioning trust (fideicomiso de abandono) and make quarterly contributions thereto as a reserve for the decommissioning and abandonment activities. Normally, the computation of said reserves is made based on:
1. the estimated production for the applicable year;
2. the remaining proven reserves; and
3. the remaining amount of decommissioning and abandonment costs at the beginning of each year of calculation. 

The contractor is responsible for the totality of the decommissioning and abandonment obligations, regardless of the existence/constitution of, or existing balance in, the decommissioning trust.

• The abandonment procedure includes, among other aspects, the activities necessary for:
1. definitive plugging of the wells;
2. restoration, remediation and/or environmental compensation, as applicable;
3. decommissioning of machinery; and
4. delivery of the contract area free of debris and waste.
• As part of the abandonment activities, the environmental baseline study (conducted upon execution of the E&P contract) must be updated, and the contractor will be liable for all environmental damages caused in the contract area as a result of the upstream activities, and must restore and/or compensate, if necessary, all the environmental damages generated above the initial environmental baseline.
• Further requirements are set forth in the General Administrative Provisions for the Decommissioning and Abandonment of Facilities in the Hydrocarbons Sector (Disposiciones administrativas de carácter general que establecen los Lineamientos en materia de Seguridad Industrial, Seguridad Operativa y protección al medio ambiente para las etapas de Cierre, Desmantelamiento y/o Abandono de Instalaciones del Sector Hidrocarburos).

In addition, the General Administrative Provisions on Industrial Safety, Operational Safety and Environmental Protection for Onshore Pipeline Transportation of Hydrocarbons, Refined Products and Petrochemicals (Disposiciones administrativas de carácter general que establecen los Lineamientos en materia de seguridad industrial, seguridad operativa y protección al medio ambiente, para el transporte terrestre por medio de ductos de petróleo, petrolíferos y petroquímicos) establish the minimum technical requirements for safety and environmental protection regarding the deactivation, closure, decommissioning and abandonment of onshore pipelines.

The General Climate Change Law (Ley General de Cambio Climático) provides the framework to prevent, mitigate and adapt to the effects of climate change. This law has created a “National Emissions Registry”, to which the greenhouse gas emissions of industrial activities must be reported. The regulations of this law set forth the obligation for these generators to identify their direct and indirect greenhouse gas emissions, and to measure, compile and report them to the registry.

At the state level, every state in Mexico has the capacity to oversee those environmental aspects that are not strictly regulated by the federal government. Even though the form of regulation varies from state to state (ie, laws, regulations or standards), the subject matter generally stays the same, namely:

• non-hazardous and special management wastes;
• the environmental impact of activities not regulated by the federation;
• the ambient air emissions of some stationary sources as well as vehicles; and
• concurring regulation (with municipalities) over environmental and urban planning and human settlements.

Furthermore, municipalities have the capacity to oversee the ensuing environmental issues:

(i) the use of land on their territory, with enough authority to reject a determined use of land, if it goes against applicable urban development plans and regulations;

(ii) the supply of drinking water (when it is not extracted by a well granted under concession by the federation); and

(iii) wastewater discharge into the municipal sewerage system (as opposed to discharge into national property, such as rivers, the sea or the ground, under supervision of the federation); and, urban solid waste.

See 1 General Structure of Petroleum Ownership and Regulation and 2 Private Investment in Petroleum: Upstream for the main considerations to be taken into account for unconventional upstream projects in Mexico. There are no special schemes relating to unconventional upstream projects currently in place.

Under the Hydrocarbons Law, a prior permit from the CRE is required in order to carry out liquefaction activities. See 1 General Structure of Petroleum Ownership and Regulation and 3 Private Investment in Petroleum: Midstream/Downstream for the main considerations required for LNG projects in Mexico. There are no special schemes relating to LNG projects currently in place.

Pursuant to the Energy Transition Law (Ley de Transición Energética), Mexico has commited to reduce its national greenhouse gas emissions and to increase the generation of renewable energy.

As such, ASEA has published certain General Administrative Legal Provisions for the Prevention and Integral Control of Methane Emissions from the Hydrocarbons Sector (Disposiciones administrativas de carácter general que establecen los lineamientos para la prevención y el control integral de las emisiones de metano del sector hidrocarburos), which require hydrocarbons sector participants to prepare a baseline diagnosis of methane emissions and to prepare a programme for the integral prevention and control of methane emissions (new projects must include actions to maintain the volume of baseline methane emissions, while existing projects must establish an integral methane emissions reduction goal).

Extensive Regulation

Mexico’s hydrocarbons industry is subject to extensive regulation and supervision by the government and regulatory agencies. Certain legal and regulatory challenges faced by petroleum projects in Mexico include, among others: new laws and regulations; stricter enforcement or new interpretations of existing laws; increased supervision, review and sanctions from regulatory agencies; tougher requirements for the granting of permits and authorisations; delays at government agencies to process authorisations due to the excessive workload; and the lack of resources/experience/knowledge of the relevant authorities.

Use of Land

As mentioned in 1.4 Principal Petroleum Law(s) and Regulations, upstream activities are of social benefit and public order, thus they take precedence over any other activity that uses or exploits the surface or subsoil of the same land. As such, the Hydrocarbons Law provides for negotiation and agreement between SPEs or contractors and landowners, title-holders or beneficiaries of the rights or assets of the consideration, as well as terms and conditions for the use or encumbrance of these rights or assets. Depending on the types of use, easement, encumbrance, impact or acquisition, if applicable, the consideration will cover:

• the payment of the impact on or encumbrance of assets or rights other than land, as well as any potential damages that may be suffered as a result of the project;
• rent for the occupation of, easement on or use of the land; and
• in the case of projects that achieve the commercial production of hydrocarbons, a percentage (in the aggregate for all the landowners or title-holders in question, not less than 0.5% nor greater than 3%) of the income generated by the E&P project, to which the contractor is entitled, less any payments that must be made to the Mexican State.

Environmental Issues

Environmental issues have become a flagship fight for community-based and non-government organisations in recent years. As such, some marine ecosystems, given their fragility or if they are a habitat for protected species, may be closely monitored by universities and environmental NGO’s (even if not protected under an NPA or MEPP decree – see 5.3 EHS Requirements Applicable to Offshore Development), which often serve as watchdogs and initiators of strategic litigation when they deem a project to be a potential environmental threat to endangered species or to the degradation of such habitats.

Furthermore, some offshore projects have also faced challenges and opposition from fishing groups or communities, which allege that their fishing areas are being encroached upon and affected by these types of projects, threatening their livelihoods.

Onshore projects may face even stronger opposition by local communities, if the project in question is expected to affect environmentally-sensitive areas or if it is perceived as polluting, hazardous or requires a wide area to be developed.

The current administration has expressed a vision of Mexico’s energy sector (both power and oil and gas) based on the reinforcement of state-owned entities (ie, PEMEX). As such, in May 2021, the Hydrocarbons Law was amended to include new requirements for the granting of permits under the Hydrocarbons Law; to grant SENER and the CRE the power to suspend permits (this faculty is based on vague and subjective criteria, and grants broad discretion to the competent authority); to establish new grounds for the revocation of permits, and to eliminate the CRE’s authority to subject PEMEX to asymmetrical regulation principles (so that the former could impose certain restrictions on PEMEX that prevent certain conduct that could affect other participants in the sector). These amendments have been challenged in the courts through judicial recourses (juicio de amparo) and are currently suspended with general effect.

Other measures taken by the current administration include: (i) the suspension of the bidding rounds for E&P Contracts since December 2018; (ii) energy regulators' de facto silence to permit requests, amendments and other procedures; and (iii) the early termination of multiple permits, among others.