The International Comparative Legal Guide To: Oil & Gas Regulation 2014 - Mexico

1 OVERVIEW OF NATURAL GAS SECTOR

1.1 A brief outline of Mexico's natural gas sector, including a general description of: natural gas reserves; natural gas production including the extent to which production is associated or non-associated natural gas; import and export of natural gas, including liquefied natural gas (LNG) liquefaction and export facilities, and/or receiving and re-gasification facilities ("LNG facilities"); natural gas pipeline transportation and distribution/transmission network; natural gas storage; and commodity sales and trading.

Mexico's natural gas gross production diminished by 2.3 per cent during August 2013, registering 6,325.1 MMDCF. Such quantity of natural gas includes 678.1 MMDCF of nitrogen, which is considered an associated gas, recovered from the secondary recovery process in Cantarell. In terms of proven reserves of natural gas, as of 1 January 2013, 17,075.4 billion cubic feet were registered daily; on the other hand regarding probable reserves the quantity was of 17,826.8 billion cubic feet daily; and, for the possible reserves 28,327.1 billion daily cubic feet.

Import of LNG started in 2006 when the first LNG cargo, coming from Nigeria, was received at the LNG Altamira Terminal, the purpose of which was to produce energy to be consumed by the Federal Electricity Commission ("CFE"). However, there are several projects for LNG infrastructure development, considering the Ensenada facility that is currently being developed and other planned facilities that will be located in Michoacan, Colima, Sonora, Sinaloa and offshore Tamaulipas State; nonetheless the prospective amount of liquefied natural gas imports is 747,380 MMDCF. Natural gas exports are expected to be null.

Natural gas demand is expected to increase by 27 per cent by 2025 and notwithstanding the fact that import of natural gas in 2013 was of approximately 1,244,516 MMDCF, there is still the need to develop new facilities with the purpose to increase the natural gas imports to satisfy the ongoing demand. Regarding the extent of transportation and distribution of natural gas through the country, among the developed infrastructure there are currently 40,244 km. As the National Pipeline System is overloaded and is close to its 85 per cent capacity limit, there are new projects to increase the natural gas transportation infrastructure considering Los Ramones project which consists of 1,021.57 km, with approximately an overall investment of USD$ 2.5 billion.

1.2 To what extent are Mexico's energy requirements met using natural gas (including LNG)?

The energy requirements met have increased particularly during the last decade, for example, in accordance with the National Energy Balance for 2011 the energy requirements met using natural gas was of approximately 23 per cent, 4 per cent more than in 2000. With regard to power generation, natural gas represents 47 per cent of the total energy production, while 19 per cent is based on non-fossil fuels.

1.3 To what extent are Mexico's natural gas requirements met through domestic natural gas production?

Mexico's natural gas production is yet to be further developed in order to meet the country's requirements of said hydrocarbon; hence, approximately 30 per cent of the natural gas requirement is imported mainly from the United States of America, as there is a supply deficit compared to the demand of this fuel. For these purposes, it is worth mentioning that there are seven different entries of natural gas into Mexico, considering Reynosa as the most used; all in all the natural gas imports have fluctuated between 1 and 1.5 MMDCF during the current year 2013, as shown below in the chart.

Source: Retrieved from Energy Information System from the webpage: http://sie.energia.gob.mx/bdiController.do?action=cuadro&cvecua=PMXE1C16

1.4 To what extent is Mexico's natural gas production exported (pipeline or LNG)?

Natural gas imports in Mexico tend to increase while exports are mainly decreasing. For example, from 2006 to 2011, natural gas production exported decreased in approximately 96 per cent, while imports of this product increased in 75 per cent. In order to be able to assess the volume and value of such exports, compared to the production that is imported; the chart below shows the statistics of natural gas imported and exported monthly during 2013.

Table 1

Source: Retrieved from Energy Information System from webpage: http://sie.energia.gob.mx/bdiController.do?action=cuadro&cvecua=PMXE1C12

2 OVERVIEW OF OIL SECTOR

2.1 Please provide a brief outline of Mexico's oil sector.

Article 27 of the Mexican Constitution states that the Nation has the direct ownership of natural resources including minerals, oil and its derivatives, therefore, Petroleos Mexicanos ("Pemex"), on behalf of the State, is the only entity entitled to carry out the exploration, exploitation and any other activity considered strategic. However, services regarding these activities may be hired by Petroleos Mexicanos with particulars.

Between 2000 and 2004, oil production increased to its peak and afterwards started to decrease to 2.5 million daily barrels in 2012 (after reaching its peak around 2004 (3+ mmbbl/day)). The abovementioned seems to clash with the fact that investment has increased in the last 12 years from 77,860 to 251,900 million pesos. The main challenge is that the fields exploited for oil production are either mature or in its declination stage. Mexico has become a net importer of gasoline, diesel, turbosine, natural gas, liquefied petroleum gas and petrochemicals. Despite the biggest investment in history, proven oil reserves dereased from 20,077 MMbpce to 13,810 MMbpce in the period between 2003 and 2012; in the same period probable reserves diminished from 16,965 MMbpce to 12,353 MMbpce.

2.2 To what extent are Mexico's energy requirements met using oil?

Energy requirements are mainly met by oil production. Despite this, the use of natural gas and other renewables has increased in the last years. Only 5 per cent of the total energy production based on oil diminished from 70 per cent to 65 per cent, between the years 2000 to 2011.

2.3 To what extent are Mexico's oil requirements met through domestic oil production?

Domestic oil production is in deficit to meet current oil requirements; therefore, imports are being agreed to, though Mexico is not a net importer and actually exports important quantities to all over the world. The reason for this is that Mexico lacks the proper infrastructure to process oil and its derivatives. However, Pemex- Exploracion y Produccion (subsidiary entity of Pemex) is currently developing ten different projects that will result in an 80 per cent contribution to oil and 50 per cent of gas national requirements in order to avoid being partially dependent of foreign production.

2.4 To what extent is Mexico's oil production exported?

Mexico exports three different kinds of oil: (i) Maya; (ii) Istmo; and (iii) Olmeca. Among them, Maya is the cheapest and most exported. Oil production exports have increased in the last years and have diversified the export destinations as shown in the chart below, described in million daily barrels.

3 DEVELOPMENT OF OIL AND NATURAL GAS

3.1 Outline broadly the legal/statutory and organisational framework for the exploration and production ("development") of oil and natural gas reserves including: principal legislation; in whom the State's mineral rights to oil and natural gas are vested; Government authority or authorities responsible for the regulation of oil and natural gas development; and current major initiatives or policies of the Government (if any) in relation to oil and natural gas development.

The statutory framework for the exploration and production of oil and natural gas is firstly regulated in the Mexican Constitution, which establishes that it is the exclusive right of the Nation to have the ownership of natural resources including minerals and hydrocarbons in order to be able to carry out the exploration, exploitation and any other activity considered strategic. Additionally, Article 27 was ruled with the issuance of a Regulatory Law that states how Pemex, as a decentralised entity, is the only entity entitled to develop the activities considered strategic by law; furthermore Pemex is governed by its own enacted Law and regulation. Unlike the upstream and downstream oil activities which are exclusive to the State, the regulated activities are administrated through the Regulatory Energy Commission ("CRE") and the Regulatory Energy Commission Law that enables the CRE to grant different permits regarding transportation, distribution and storage of natural gas. Furthermore, natural gas is regulated through the Natural Gas Regulation and LP gas is ruled by its own regulation.

Table 2

Source: Retrieved from Energy Information System from webpage: http://sie.energia.gob.mx/bdiController.do?action=cuadro&cvecua=PMXF1C03

Notwithstanding the above-mentioned, the Ministry of Energy ("SENER") is in charge of conducting the energy policy of the country, within the constitutional framework, in order to guarantee high quality, economically advantageous and sustainable competitive and sufficient supply of energy for the national development. The SENER jointly working with the Hydrocarbons National...