Fluvio Ruiz Alarcón, to-be Director General of PEMEX Exploración y Producción. Image Source: El Economista.

Fluvio Ruiz Alarcón, to-be Director General of PEMEX Exploración y Producción. Image Source: El Economista.

Fluvio Ruiz Alarcón laid out the pillars of the next administration’s key legislative modifications to strengthen PEMEX on Aug. 19, shortly after he was nominated to be Director General of PEMEX Exploración y Producción. The former independent counsel for PEMEX said that to reinvigorate the NOC a number of measures were needed. The state-owned oil company must be removed from the federal budget, the regulatory asymmetries imposed on the company should be eliminated and the government must restore its mandate to ensure the country’s energy security. To allow these measures to reach maturation, Ruiz said CNH’s licensing rounds and future PEMEX farmouts should be halted for the next two years. Carrying out these measures implies modifying several articles of the country’s Hydrocarbons Law, published in the Official Journal of the Federation on Aug. 11, 2014. The main modifications include:

 

Article 4 – Definitions. Review all definitions and concepts, such as natural gas or petrochemicals, to reorient them toward the nature of what is defined and not the legal use of said concepts, which is unintelligible.

 

Article 6 – Assignations. Directing E&P assignations to PEMEX to fulfill strategic E&P goals should be an attribution of the State and of every democratically elected government and CNH should provide a positive opinion.

 

Article 12 – Migration of Assignations to E&P Contracts (CEEs). Every process to migrate an assignation to a CEE should be supported by its exploration or development plan accordingly. Various assignations could be migrated into a single CEE.

 

Article 13 – Selecting Partners for Alliances Regarding Migration Cases. This modification is called to revert partner selection back to PEMEX. Legal entities enabled to participate will only be those that meet pre-qualification requirements as set by CNH. PEMEX will choose its partners according to the Mexican Petroleum Law (PEMEX Law).

 

Article 14 – Alliances or Associations to Participate in CEEs. Article 14 will enable PEMEX to celebrate alliances or associations for activities inherent to CEEs, including those derived from a migration, where the NOC functions as the operator.

 

Article 15 – Control Transfer in the Contractual Area Operations. CNH should specify the authorization of alliances or associations where the corporate and operational controls could be transferred to either the operators or its contractors.

 

Article 16 – Reducing the Possibility to Provide Contracts for Different Depths Within the Same Contractual Area. The current configuration of Article 16 can withhold potential conflicts between different operators working in the same contractual area at different depths. Only in exceptional cases should it be allowed that a contractual area coexist with more than one operator.

 

Article 17 – Transboundary Reservoirs. Regarding transboundary reservoirs, PEMEX should have total operational control of the field on the Mexican side given the national security nature of these reservoirs. Any operators or partners of PEMEX would be allowed to have no more than 51 percent and no less than 20 percent participation.

 

Article 20 – CEE Termination. The current Law unjustifiably limits the causes to terminate E&P contracts. The State should have the legal attribution to terminate these contracts when it suits the national interest. This should include cases where the economic, financial or fiscal results of the operation of the contract turn out to be manifestly disadvantageous for the country.

 

Article 21 – Calvo Clause. To reinforce the notion that CEEs are only subject to the Mexican law, Article 21 will explicitly establish contract holders will not be able to invoke the protection of foreign governments, under any circumstance.

 

Article 28 – Hydrocarbons Commercialization. Hydrocarbons obtained by the State as a result of E&P contracts should be marketed exclusively by PEMEX and its subsidiaries. There is no reason to put PEMEX PMI aside.

 

Article 42 – PEMEX’s Asymmetric Regulation. AMLO’s team looks to eliminate the Ministry of Energy’s directionality faculties outlined in Article 42 to instruct PEMEX, its subsidiaries and affiliate companies to avoid obstructing competition and efficient market development.

 

Article 95 – Sustainable Development. Make sustainable development an evaluable process to strengthen Article 95 based on the definitions of the General Law on Ecological Equilibrium and Environmental Protection. These evaluations would be better coming from ASEA.

 

Article 100 – Repositioning the State as Payment Negotiator for Land Use and Superficial Occupation. Exploration and Production activities’ payments must be regulated by CNH and not left between oil companies and landowners or communities.

 

Article 117 – Land Use and Superficial Occupation. Limit Article 117’s dispositions to land acquisition, use or impact, eliminating the reference to pipeline transport activities.

 

Finally, these modifications come hand-in-hand with AMLO’s plan to:

 

  • Intelligently manage the declining oil and gas resources of the country
  • Decrease Mexico’s energy dependency
  • Increase the efficiency and safety in the oil and gas value chain of the country
  • Rationalize energy consumption
  • Reassess the role of PEMEX in the development of the energy industry
  • Improve transparency and accountability in energy-related activities, companies and regulators
  • Promote research, technological development and training of human capital specialized in the energy sector
  • Democratize energy policy, respect the decisions of the communities and promote the strengthening of independent union systems
  • Recover the notions and instruments of geopolitics and national security in the oil and gas industry.
  • Accelerate Mexico’s energy transition from fossil fuels to renewable sources.

 

 

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