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Mexican national content considerations and other issues are required for foreign energy sector participation

Mexican national content considerations and other issues are required for foreign energy sector participation

On December 20, 2013, the Mexican Executive Branch published a groundbreaking Decree amending and adding provisions to the Mexican Constitution on energy-related matters.

Through the amendment of articles 25, 27, and 28 of the Mexican Constitution, Mexico’s long nationalized energy sector was opened to private parties particularly in areas pertaining to the generation and commercialization of electric energy and the exploration and extraction of oil and other hydrocarbons. PEMEX will now become a state company that will work in conjunction with private companies, both local and foreign, with the objective of turning a profit and increasing the nation’s income and well-being. Before foreign companies can gallop in to begin prospecting for business opportunities, three important areas of concern, including the use of Mexican national content, that are addressed in the legislation must be taken into account.:

  • First, this future partnership with foreign energy companies must occur for the express purpose of benefiting Mexican citizens and businesses. As a condition for the awarding of contracts and assignments in the energy sector, the law must soon provide for minimum amount of Mexican national content to be used in any project. It must also provide mechanisms to promote national industry, but only within the realm of non-discrimination rules, international law, and trade agreements (like NAFTA). The implementing legislation will determine what mechanisms can be used, how Mexican national content requirements will be enacted, as well as minimum percentages for national requirements.
  • Secondly, this Decree addresses environmental concerns in an historic manner. While previous energy reforms were more about increased profitability, this reform enshrines the principle of sustainability in the nation’s constitution, including obligations for the use of clean energy as well as standards for emissions reduction. The government plans to implement a system of emissions credits that companies can buy and sell to comply with the new requirements. The reform legislation obligates the Congress to incorporate better practices regarding efficiency in the use of energy and natural resources, reduction in the generation of greenhouse gases, the lowering of waste generation and emissions, and an overall reduced carbon footprint. These steps will allow for the coming growth of Mexico’s energy sector and renewed interest from foreign investors to be a responsible, environmentally friendly, and sustainable boon for the country.
  • Thirdly, in order to preclude favoritism or corruption in this newly opened field of economic opportunity for foreign and private domestic investors, Congress is required to issue legislation by April 19, 2014 to establish legal mechanisms to prevent, investigate, identify, and punish contractors and public servants, national or foreign, that break, bend, or exploit the law to influence policymakers’ decisions for financial gain. In short, the Decree establishes aggressive requirements for combating bribery, and other forms of corruption exploitation.

The Energy Reform Decree includes terms ensuring that contracts, regarding both domestic and foreign companies, will include transparency clauses, that there will be external audits, and that financial information regarding compensation, taxes, etc. will be openly available. Foreign and domestic private investors, the government and the nation’s people all stand to gain from the opening of the Mexican energy sector after decades of insularity. Mexico’s government has chosen to take a holistic view of this historic opportunity by addressing the issues of the use of Mexican national content in the development of the industry, by making provision for sustainability in the sector and by taking preemptive measures to reduce the potential for graft and corruption.

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