CCN MEXICO REPORT

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Issue #
119
 – 
January 2014

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Energy Reform

January 12, 2014

On December 21, 2013, the decree that reformed Articles 25, 27 and 28 of the Mexican Constitution relating tothe energy, electric and hydrocarbon sectors came into effect. This decree is best known as the “EnergyReform.”In addition to reforming the three constitutional articles cited above, the Energy Reform decree contains 21transitory articles which establish, among other things, that within the following 120 days, Congress must makethe necessary modifications to applicable secondary legislation in order to fully implement the new EnergyReform decree. The Energy Reform encompasses both hydrocarbons and electricity.(A) Hydrocarbons:The Energy Reform does not open Petróleos Mexicanos (“PEMEX”) to direct private ownership and investment;however, it will allow PEMEX to develop as a “productive entity of the state” in conjunction with private,domestic and foreign entities. Consequently, the Energy Reform will allow domestic and/or foreign companies tojoin PEMEX as participants in developing new oil and gas exploration and extraction projects. Similarly, theEnergy Regulation Commission (Comisión Reguladora de Energía [“CRE”]) is authorized to grant to PEMEXand/or certain companies various permits for refining, petrochemical production, transportation, and storage ofsuch hydrocarbons and their derivatives, including regulation for third party access to pipelines and first handsale of such products.The Energy Reform allows private sector investment in exploration and extraction of oil and hydrocarbons insolid, liquid or gas form by means of certain flexible contracts, the same which are standard in this branch of theindustry. In accordance with the decree, such contracts may be for: (i) services; (ii) profit or production sharing;or (iii) licenses. Similarly, and in relation to such contracts, the Energy Reform also contemplates the followingpotential forms of payment/consideration: (a) cash, for service contracts; (b) a percentage of profits for profitsharing contracts; (c) a percentage of production obtained for shared production contracts; (d) transfers ofhydrocarbons in exchange for good and valuable consideration once extracted from the subsurface pursuant tolicense contracts; and (e) any combination of such forms of consideration.During the next few months, various amendments will be made to the secondary legislation in order to regulatethe mentioned contracts mentioned, including the tax regime applicable to such contracts and the privateinvestment companies that may be formed for such purposes. It is important to note that, to date, it is uncertainwhether the production of oil and/or gas will be subject to the application of any tax such as: (i) a tax on profits,such as the income tax (Impuesto Sobre la Renta [“ISR”]); (ii) royalties or tax on consumption, meaning apercentage of the value of production; (iii) a bonus; and/or (iv) a combination of the prior items.The Energy Reform will also create three important new entities: (i) the Center for Control of Natural Gas(Centro de Control de Gas Natural [“CENEGAS”]), which will be responsible for the operation of the nationalsystem of pipelines for transportation and storage of natural gas; (ii) the Mexican Oil Stabilization andDevelopment Fund (Fondo Mexicano del Petróleo para la Estabilización y el Desarrollo [“FMPED”]), whichwill be in the form of a public trust in which the Mexican Central Bank (Banco de México) will act as trustee; and(iii) the National Agency for Industrial Safety and Environmental Protection in the Hydrocarbon Sector (AgenciaNacional de Seguridad Industrial y de Protección al Medio Ambiente del Sector Hidrocarburos), which will beresponsible for regulating and supervising the facilities and activities of such sector with respect to industrial andoperational safety and environmental protection.(B) Electric Energy:With respect to electric energy, the Energy Reform allows for individuals to participate in the generation ofelectricity. Under the new law, electricity generators will have open access, without discrimination, to Mexico’selectricity transmission and distribution networks.Even though the government will maintain exclusive control of the National Electrical System, including thepublic services necessary for the country’s electricity transmission and distribution networks, individuals willnow be allowed, by means of contracts with the government, to perform financing, installation, maintenance,management, operation and expansion activities of infrastructure to provide public services for the transmissionand distribution of electrical energy.Under the new law, the Federal Electricity Commission must also convert itself into a “productive company ofthe State” within the following two years, which will strengthen its operating and organizational structure andserve to make its services more efficient and lower in cost.The creation of the National Energy Control Center is contemplated, the same which will be in charge of theoperating controls for the National Electrical System, operating the electrical wholesale market and open access,without discrimination, to the national transmission of electricity and the general electricity distribution networks.The technological development and adoption of lower cost and cleaner energy sources will be developed, such asgas, solar and wind energy, as well as to regulate the exploration and exploitation of geothermal resources inorder to take advantage of underground energy to generate electrical energy or to designate it for various uses.

Minimum Wage Increase
January 12, 2014
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Energy Reform
January 12, 2014
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