- Mexico has vast oil and natural gas reserves, including unconventional resources like shale, but Pemex lacks the technology and experience to fully tap these reserves. Bringing in international oil companies could help Mexico increase production and improve energy security. - Mexico currently imports refined fuels like gasoline and liquefied natural gas due to insufficient domestic refining and transportation infrastructure, making it vulnerable. The energy reform aims to attract private investment to boost production and processing. - The reform will not privatize Pemex or allow private ownership of hydrocarbons in the ground, but may permit partnerships where private companies conduct exploration and production activities under new contract terms. This could incentivize more domestic and foreign private investment and technology transfer

1. Energy & Natural Resources
CMS Cameron Mckenna - Simmons & Simmons LLP - Clifford Chance - Fasken
July 2013
Expert Guide

2. 38 - Expert Guide : Energy & Natural Resources 2013 Expert Guide : Energy & Natural Resources 2013 - 39
ture structures with private investors. Certain
constitutional and legal amendments would need
to occur for this to happen, but it is not out of the
question, particularly considering that there is
firm understanding that in the absence of some
immediate increase in production, Mexico may
face the daunting scenario of becoming a crude oil
importer by as early as the year 2020.
Shale Oil & Gas
Except for coal-bed methane, Mexican laws and
regulations make no distinction between conven-
tional or unconventional resources. However,
the fact that highly specialised technology and
expertise are needed to tap such unconventional
resources, and since such technology and exper-
tise are somewhat alien to Pemex, commentators
agree that the best way to obtain these resources is
by allowing private parties to participate in explo-
ration and production activities, in a manner suf-
ficiently attractive to them, without granting actu-
al rights over the reserves or products. However,
it is yet to be seen how the Mexican government
intends to foster investment in these projects and
therefore, how these resources will be tapped into
and what will be the incentives for the particular
investments to be made in a legally and economi-
cally sound environment.
Downstream Activities
As indicated in the Pact, one of the areas that will
be addressed in a Mexican hydrocarbon reform,
are the refining, petrochemical and hydrocarbon
transport systems, activities that to date can only
be performed by Pemex. The Pact sets forth that
reforms to create a competitive environment in
such areas must be approved. Does that imply
that the reform should allow private parties to re-
fine and transport hydrocarbons?
Opportunities in the Mexican Oil & Gas Sector In Light of the Potential
Reform to the Hydrocarbon Sector By Juan Francisco Torres Landa R. & Miguel Angel Mateos S.
urrently the reserve-to-production ra-
tio of Mexico is 10.2 years.1 Mexico
has vast reserves of unconventional
resources. However, Pemex lacks the
technology and experience to tap such
reserves. Bringing International Oil Companies
(“IOC’s”) with the appropriate know-how will cer-
tainly assist Pemex in properly understanding the
risk profile of unconventional hydrocarbon proj-
ects, and will allow Pemex to increase Mexico’s
reserves, thereby improving the country’s energy
security levels.
Commentators generally agree that energy secu-
rity implies the ability of a given country to ob-
tain reliable energy sources at a reasonable price.
Hence, having vast hydrocarbon resources (un-
conventional or otherwise) by itself is not a solu-
tion to improving the energy security of a coun-
try. Several factors play a fundamental role in
defining a strategy to increase the energy security
in a country.2 Having vast hydrocarbon reserves,
without the ability to process or transport them
makes a country vulnerable to market distortions.
A good example in Mexico is gasoline. Mexico’s
refining capacity is insufficient to meet demand.
Demand is met by imported gasoline from Unit-
ed States refineries. As a result, Mexico is a net
importer of gasoline. As opposed to the general
practice of oil producing and non-oil producing
countries, where refining capacity is established
in such a manner that will ensure domestic pro-
duction at levels that reduce reliance on imports,
Mexico has chosen not to expand its capacity and
rely on the United States as a provider of refined
product. 3
A similar situation occurs with natural gas. Even
though Mexico sits above material natural gas
reserves (conventional and shale gas4), produc-
tion does not meet national consumption, which
makes it necessary to rely on: (i) natural gas im-
ported from the United States; and (ii) natural gas
imported from other jurisdictions (i.e., Peru and
Nigeria) at European price levels (approximately
US$16 per MMBTU). In addition, lack of trans-
portation infrastructure creates several other bot-
tlenecks that directly affect Mexico’s energy secu-
rity strategy.
The Response – Pact for Mexico
Keeping in mind the issues discussed in Section
1 above, the Mexican government led by Presi-
dent Enrique Peña Nieto mustered support of the
main political parties to sign the “Pact for Mexi-
co” (Pacto por México – the “Pact”). The Pact is
an instrument that reflects the understanding of
what are the common goals shared by the three
most relevant political parties in Mexico with re-
spect to several structural issues of the Mexican
economy, politics and development. The energy
sector is prominently included in the Pact. Parties
to the Pact acknowledged the need to reform the
hydrocarbon sector, but each party had its own
view as to the scope and reach of the required en-
ergy reform. The purpose of the Pact is to set forth
the main ingredients for an energy reform to be
discussed in Congress, with the aim to modernise
the sector, open up the opportunities for private
investment, and otherwise achieve the objectives
detailed in the Pact.
Base on the Pact, the current Mexican adminis-
tration is striving to achieve an aggressive energy
reform (especially focused on hydrocarbons). The
purpose of the reform is to make the hydrocar-
bon sector in Mexico one of the most important
growth instruments through the attraction of in-
vestment and technological developments.
Under the Pact, title to hydrocarbons will remain
with the Mexican State. However, the Pact does
C
provide for hydrocarbon exploration and produc-
tion capacity to be expanded in order to maximise
oil & gas revenue in Mexico. Likewise, the Pact
seeks to create a competitive environment in the
downstream sector, without actually privatising
Pemex.
Putting aside the modification to Pemex (and
Mexico’s tax regime), 5 the general framework un-
der which legislators will start working on the re-
form to the hydrocarbon sector is quite broad and
somewhat unclear at this time. However, based on
the shortcoming of an earlier reform back in 2008
it is believed that the hydrocarbon reform will fo-
cus on the following topics:
Pemex Contracting and Association Regime
Modifying the legal regime to allow private inves-
tors to obtain title to hydrocarbons in Mexico (in
the subsoil or at wellhead) will most likely not oc-
cur (no licenses or concessions). Likewise, pro-
duction sharing contracts will not be allowed, nor
will provisions allowing Pemex to pay the contrac-
tor in kind (with hydrocarbons).
However, the Pact does indicate that Mexico’s E&P
capacity must be developed and increased. Politi-
cal leaders have mentioned that one way in which
to achieve such expansion in capacity is by allow-
ing private parties to explore and produce under a
more competitive structure. This approach would
enable private investors to be compensated for the
risks they actually undertake. The current regime
places a considerable amount of risk with the con-
tractors with no upside potential. By leveling the
risk allocation process in the new contracts, more
national and international investors will be at-
tracted by the Mexican regime, resulting in an in-
crease of IOC’s exploration and production of hy-
drocarbons in Mexico, particularly in areas where
Pemex lacks the technology, experience and/or
other resources.
Another scenario that may be considered by the
political parties that are signatories to the Pact
would be to allow Pemex to enter into joint ven-

3. 40 - Expert Guide : Energy & Natural Resources 2013 Expert Guide : Energy & Natural Resources 2013 - 41
That is the big question that must be answered. How-
ever, the manner in which the Government intends to
create a competitive environment in such areas is yet
to be seen, as the Mexican government has disclosed
very little information in this regard. The focus ap-
pears to be now on discussing the reform to the up-
stream sector.
Conclusions
Investment opportunities in the Mexican oil & gas
sector are expected to be created based on an ener-
gy reform that allows private investors to participate
more actively in upstream and downstream activi-
ties. The reform is not aimed at creating an integrated
and liberalised industry as a whole, where upstream,
midstream and downstream activities are fully per-
formed by private parties, with the supervision of the
State as regulator. The reform is instead aimed at al-
lowing private investment in the indicated sectors and
activities, without privatising Pemex, but reducing the
current monopoly it has on the entire sector. For it to
be successful, the reform must result in the increase of
Mexico’senergysecurity,reducingrelianceonimports
of gasoline and natural gas and reducing governmen-
tal reliance on the oil & gas revenue – the energy re-
form can only be understood in tandem with a deep
reform to the tax systems in Mexico. Moreover, by as-
suring Mexico’s energy security, the sector may boost
the domestic economy by making Mexico a preferred
destination for large investments in the sector. Op-
portunities are expected to come immediately in ser-
vice contracts for the exploration and production of
hydrocarbons in: (i) the deepwater area of the Gulf of
Mexico; and (ii) shale oil and gas. However, the legal
and economic implications of these options will de-
pend on the final content of this much awaited and
needed energy reform.
Civil, Commercial and Cor-
porate Law; Project Financ-
ing; M&Acquisitions; Foreign
Trade; Arbitration; Immi-
gration Law, Environmental
Law, Economic Competition-
Antitrust; Mining; Taxation
for Non Residents and Tele-
communications. Juan Fran-
cisco Torres Landa can be
contacted via phone on +52
55 5091 0000 and email at jftl@bstl.com.mx
1 - www.pemex.com
2 - Since we are addressing hydrocarbons in this article, we consider it more convenient to remain on topic and discuss the elements conforming Mexico’s energy matrix at another time.
3 - Pemex even has a 50/50 JV with Shell to operate a refinery in Deer Park, Texas.
4 - Mexico is one of the top ten countries in the world in terms of shale gas reserves.
5 - Mexico is a textbook example of the “resource curse.” Reforms to the tax laws are envisioned to reduce the reliance of the Mexican government on oil & gas revenues.