2008 ENERGY REFORM IN MEXICO FOREWORD

Transcription

1 2008 ENERGY REFORM IN MEXICO FOREWORD This memo contains a summary of reforms published in the Federal Official Gazette of Mexico on November 28, This is not a constitutional reform. Articles 25, 27 and 28 of the Mexican Constitution have not been changed, i.e., government guardianship on hydrocarbons is maintained, as well as property, control and public domain of said resources by the nation. The New Law of Petróleos Mexicanos ( Law of PEMEX ) contains the majority of the so called energy reform (that also includes other reforms analyzed hereinbelow), and mainly deals with PEMEX reorganization and operation. It sets forth that PEMEX shall obtain assistance from subsidiary entities in order to perform transportation, storage, distribution, refining and basic and secondary petrochemical production activities. The Board of Directors is reorganized and formed by 15 members: six designated by the Federal Executive, five union representatives, and the main item, four professional counselors. PEMEX is granted more freedom to take on debt and PEMEX may finance itself using citizen bonds that may only be acquired by Mexican nationals or certain Mexican corporate entities. It contains rules for PEMEX to contract construction and public services related to exclusive activities. Contracts will be awarded by public bid, and may only have money payments as consideration for services or construction, and no agreement may be entered into whereby the original ownership rights on oil are compromised, nor related to sales or profits. PEMEX may in international contracts agree to apply foreign law and even, in commerce affairs be subject to the venue of foreign tribunals and agree on arbitration. PEMEX will supply raw materials required by fertilizer producers and ammonia distributors in a stable manner. The principles supporting this reform are to confirm ownership and control by the Nation on hydrocarbons located in Mexico, the continental platform and the exclusive economic zone; to prohibit agreements for shared production, risk contracts and association in strategic areas 1 ; legal clarity and certainty is granted with respect to construction and service contracts; likely existence of trans-border oil fields is acknowledged, in and outside of national jurisdiction, and its use for profit will be performed pursuant to international treaties. 1 Article 6 of the Regulatory Law of Article 27 of the Mexico Constitution in the area of Oil; also article 60 of the Law of PEMEX. 1

2 I. Reforms to the Regulatory Law of Article 27 of the Mexico Constitution in the area of Oil (Federal Official Gazette dated November 28, 2008, in effect as of the following day). Changes to this law do not modify the monopoly regime of the oil industry. Oil transportation, storage, refining and production of basic petrochemicals continue being monopoly activities of the Mexican State, although they will now be performed by means of PEMEX subsidiary entities. The main change refers to oil fields located in the exclusive economic zone, i.e., the zone next to territorial waters, and that introduces the concept of fields across the border, i.e, oil fields located in national territory, but extended beyond them, as well as those located in the exclusive economic zone and shared with other countries. It clearly refers to fields located in the Gulf of Mexico that may be shared with the United States and Cuba. The latter oil fields will be developed pursuant to treaties executed by the President and approved by the Senate of the Republic. A special regime to enter into construction and services contracts by PEMEX has been devised where consideration to contractors will always be paid in cash, and may be subject to results obtained by contractor, as long as no property right on hydrocarbons, nor any percentage of production nor any share on profits is granted to contractor. PEMEX will not be subject to foreign jurisdictions with respect to construction and services contracts that are to be executed in national territory. Contracts may include arbitration agreements pursuant to Mexican Laws and international treaties to which Mexico is a party. Contractors may not record any reserve of hydrocarbons as their own asset or liability, nor fix any sales price, nor control exploration, exploitation and development of oil fields. 2 As to gas related to mineral carbon (also known as grisú gas ), it is subject to general provisions applicable to transportation, storage and distribution of gas (articles 3 and 4 of the Regulatory Law of Article 27 of the Mexico Constitution in the area of Oil). Its industrial use for profit or delivery may be provided by contract to PEMEX and subsidiary entities. 3 Environmental provisions include prevention and repair actions regarding environmental damage; limits for oil reserve zones; and ecosystem restoration and conservation. This reform strengthens the regulatory capacity of the State in the area of oil and gas, by means of authority of the Department of Energy and the National Commission of Hydrocarbons (NCH) to issue general norms; and establishing safety measures by NCH and the Energy Regulation Commission (ERC), such as suspension of works, construction or closing down of facilities, seizure of 2 Article 60 of the Law of PEMEX; Articles 3, 4 and 6 of the Regulatory Law of Article 27 of the Mexico Constitution in the area of Oil. 3 Article 4 of the Regulatory Law of Article 27 of the Mexico Constitution in the area of Oil. 2

3 substances, materials and equipment; immobilizing vehicles and auto-tanks, and unassembling of facilities. II.- Law of PEMEX A. Strengthening of Petróleos Mexicanos The Law of PEMEX is an important step toward the development of the Mexican oil industry and simultaneously looks forward to guaranteeing the energetic security of the country. This law sets forth a new form of industrial organization, decision taking processes and specific operation mechanisms, as well as a proper and flexible contracting framework that promotes better performance of contractors subject to the constitutional framework. Its purpose is to govern PEMEX organization, operation, control and rendering of accounts, as well as to provide general rules to its subordinated entities. It is a decentralized government agency with productive purposes, legal capacity and its own assets. Its purpose is to explore, to use hydrocarbons for profit, as well as to perform activities corresponding to other strategic oil areas. Moreover, PEMEX may cogenerate electric energy for self consumption and sell its surplus to the Federal Commission of Electricity and to the Lighting Company ( Luz y Fuerza del Centro ). B. Corporate governance.- Organization and operation PEMEX will be led by a Board of Directors, and a General Director appointed by the Federal Executive. PEMEX Board of Directors has authority, among others to centrally conduct and strategically direct PEMEX and its subordinated entities; to monitor and assess its performance; to approve the Business Plan every year; and to approve policies and guidelines in the area of compensation and wages, operations, granting of guarantees, accounting policies and information requests. The latter will allow fostering the creation of economic value; restitution of hydrocarbon reserves; progressive reduction of environmental impact from hydrocarbon production and consumption; satisfaction of energy needs; savings in, and efficient use of, energy; increase the execution capacity of its strategic activities; Mexican engineering and support research and technological development. Formation of PEMEX Board of Directors. It shall be formed by 15 members: (i) six State representatives, designated by the Federal Executive; (ii) five representatives of the Union of Oil Workers of the Mexican Republic, and (iii) four professional advisors proposed by the Federal Executive and ratified by the Senate, who will be qualified as public officers. New decision making rules for the PEMEX Board of Directors. Mechanisms are provided to guarantee decision making by majority and in the event of disagreement, members of the board may present their reasoned vote by specifying time periods for their performance. Members decisions and 3

4 dissenting opinions shall be disclosed to financial markets. Members representing the State must vote during the respective meetings in either an affirmative or a negative manner. If negative they shall issue a reasoned vote. Budget items may only be voted by State representatives. Members of the Board shall act in a diligent and loyal manner; be subject to the Civil Service Liability Law; be jointly liable in the decision making process; and repair damages caused by them, regardless of their dismissal. Members of the Board may be removed for the reasons contained in, and pursuant to, the proceeding set forth in the Law of PEMEX. Operation of subordinated entities: Subordinated entities shall be directed by a Board of Directors and a General Director designated and removed by the Federal Executive, at PEMEX General Director s proposal. Formation of the Board of Directors of subordinated entities: They shall be formed by PEMEX General Director, State representatives designated by the Federal Executive, and At least two professional advisors, designated by the Federal Executive representing the State. State owned subsidiaries. The General Director may propose PEMEX Board of Directors to organize subsidiaries under PEMEX control or under the control of its state-owned subordinated entities with no need to be subject to proceedings contained in the Federal Law of State-Owned Companies and its regulations. PEMEX Board of Directors Committees. PEMEX Board of Directors shall have the following committees in order to accomplish its purposes: 1. Audit and Performance Assessment.- Its purpose is to monitor the financial and operating performance of the entity Strategy and Investment.- It shall define the Business Plan and investment portfolio Compensation.- This committee shall propose the compensation mechanism of all three hierarchy levels under the General Director based on performance and measurable results. 6 4 Formed by threee profesional counselors and presided in a position rolling manner by one of them as decided by the Board of Directors. Article 23 of the Law of PEMEX.- El Comité de Auditoría y Evaluación del Desempeño estará integrado por tres consejeros profesionales y será presidido, de manera rotatoria, por uno de ellos, según lo determine el Consejo de Administración. A las sesiones del Comité asistirá un representante de la Secretaría de la Función Pública, como invitado permanente, con voz pero sin voto. 5 Presided by a professional counselor. Article 24 of the Law of PEMEX.- El Comité de Estrategia e Inversiones estará presidido por un consejero profesional y tendrá, entre otras funciones, el análisis del plan de negocios y el portafolio de inversiones de dicho descentralizado y sus organismos subsidiarios. Asimismo, llevará el seguimiento de las inversiones y su evaluación, una vez que hayan sido realizadas. 6 Presided by a professional counselor. Article 25 of the Law of PEMEX.- El Comité de Remuneraciones será presidido por un consejero profesional y tendrá a su cargo, entre otras funciones, proponer al Consejo de Administración el mecanismo de remuneración del Director General y de los funcionarios de los tres niveles jerárquicos inferiores a éste, tomando en consideración el otorgamiento de 4

5 4. Procurement, Leases, Construction and Services.- It is in charge of proposing guidelines to undertake substantive activities of productive nature 7 and improve project efficiency, as well as contracting Environment and Sustainable Development.- This committee shall foster and apply environmental preservation and sustainable development policies Transparency and Rendering of Accounts.- This Committee shall be in charge of introducing best practices of the industry, as well as of classifying and spreading information Development and Technological Research.- Its purpose is to assimilate technological progress from productive processes. 11 Pursuant to the Fifth Transitional Provision of the Law of PEMEX, the existing committees shall continue operating while new ones are installed. C. Transparency and rendering of accounts. PEMEX shall, in March of every year, present to Congress by means of the Department of Energy, a report containing at least a performance report of PEMEX and its subordinated entities, its main existing projects, financial and result statements; quarterly reports to Congress on PEMEX operation and performance through the Department of Energy; a report to the Department of the Treasury and Public Credit through the Department of Energy on the use of debt, project profitability, financial condition, handling of associated availability of the debt, execution calendars, disbursements and business profile. incentivos con base en el desempeño y resultados medibles, dentro de los límites establecidos en el tabulador correspondiente. 7 See Article 3 of the Regulatory Law or article 27 of the Mexico Constitution in the Area of Oil for substantive activities of productive nature, such as exploration, exploitation, refining, transportation, storage, distribution and first hand sales of oil and products obtained from refining oil; exploration, exploitation, production and first hand sales of gas, as well as necessary transportation and storage to interconnect exploitation and production of the same; production, transportation, storage, distribution and first hand sales of oil and gas derivatives that may be used as basic industrial raw materials and that are considered basic petrochemicals such as ethane, propane, butane, pentane, hexane, heptanes, raw material for lampblack, naphtha and methane from hydrocarbons obtained from fields located in Mexico and used as raw material in industrial petrochemical processes. 8 Presided by a professional counselor. Article 26 of the Law of PEMEX.- El Comité de Adquisiciones, Arrendamientos, Obras y Servicios será presidido por un consejero profesional. A las sesiones del Comité asistirá un representante de la Secretaría de la Función Pública, como invitado permanente, con voz pero sin voto. 9 Formed by three professional counselors and preside in a position rolling manner by one of them as decided by the Board of Directors. Article 28 of the Law of PEMEX.- El Comité de Medio Ambiente y Desarrollo Sustentable estará integrado por tres consejeros profesionales y será presidido, de manera rotatoria, por uno de ellos, según lo determine el Consejo de Administración. A las sesiones del Comité asistirá un representante de la Secretaría de Medio Ambiente y Recursos Naturales, como invitado permanente, con voz pero sin voto. 10 Presided by a professional counselor. Article 29 of the Law of PEMEX.- El Comité de Transparencia y Rendición de Cuentas será presidido por un consejero profesional. 11 Article 30.- El Comité de Desarrollo e Investigación Tecnológica tendrá por objeto proponer al Consejo de Administración acciones de investigación y desarrollo de tecnología en los distintos campos propios y relacionados con las actividades de la industria petrolera. Este Comité considerará las propuestas de las instituciones de educación superior y de investigación científica y tecnológica y de la comunidad científica en general, para incorporar innovaciones en Petróleos Mexicanos y sus organismos subsidiarios. El Comité podrá invitar, en forma honorífica, a participar en sus sesiones, con voz pero sin voto, a representantes de las instituciones de educación superior y de investigación científica y tecnológica. 5

6 The statutory auditor shall be appointed by the Federal Executive and present an annual report on PEMEX operating program and financial situation, as well as on PEMEX compliance with recommendations made by audit committees. 12 PEMEX audit committees. A broad control and supervisory scheme is proposed for PEMEX better performance, and is formed by an audit and performance assessment committee; a statutory auditor; an internal control bureau; the Superior Auditing Department of the Federation; and an external auditor. D. PEMEX reorganization as an entity with productive purposes. PEMEX new orientation shall be reflected in its bylaws. 180 days after the effective date of the Law (i.e., May 21, 2009), the PEMEX Board of Directors shall, at its General Director s proposal, approve bylaws defining the organization and operating structure to better accomplish its corporate purpose and activities regarding its technical, commercial and industrial scope. As to subordinated entities, they shall be organized by the head of the Federal Executive, at PEMEX Board of Directors proposal, as decentralized government agencies with productive purposes of technical, industrial and commercial nature, with legal capacity and their own assets; they shall operate in a coordinated manner, consolidating operations, financial resources, general accounting, reports and rendering of accounts pursuant to best corporate practices. E. Citizen bonds. They are credit instruments issued by the entity itself that grant their holders 13 a profit linked to its performance. The aforementioned profit shall in no event and for no reason whatsoever grant their holders any corporate rights, nor on PEMEX property, control nor on its assets. All resources obtained by PEMEX from issuing citizen bonds shall be bound solely to finance productive works. The Department of the Treasury and Public Credit shall publish guidelines to issue and place those citizen bonds. F. Budget. PEMEX shall send every year to the Department of the Treasury and Public Credit, through the Department of Energy, a financial statement goal scenario for the oncoming five years. PEMEX Board of Directors shall approve 12 Article 34 of the Law of PEMEX. 13 Article 47 of the Law of PEMEX.- Sólo podrán ser titulares de los bonos ciudadanos las personas físicas de nacionalidad mexicana y las siguientes personas morales mexicanas: a) Sociedades de inversión especializadas en fondos para el retiro; b) Fondos de pensiones; c) Sociedades de inversión para personas físicas, y d) Otros intermediarios financieros que funjan como formadores de mercado. Las instituciones del sistema financiero que representen a los tenedores respectivos u operen sus cuentas serán responsables de que se cumpla con las medidas para evitar el acaparamiento de los bonos ciudadanos, de acuerdo con lo establecido en este artículo y las disposiciones que se emitan de conformidad conel mismo 6

7 changes to its budget and the budget of its subordinated entities with no need to obtain approval from the Department of the Treasury and Public Credit. Financial Autonomy. The law enables PEMEX to commit to outside financing that it may require pursuant to the terms and conditions approved by the PEMEX Board of Directors with no need to obtain approval from the Department or the Treasury and Public Credit. This Department shall, at PEMEX proposal, approve guidelines regarding the features of PEMEX debt. PEMEX assumed obligations shall never exceed its payment capacity. G. Procurement, leases, services and public works. In this area, the law provides a specific contractual regime whereby PEMEX and its subordinated entities may enter into construction and services agreements, as required, to allow better performance of their activities, provided however that aonsideration shall always be in cash; no property rights shall be granted in any case whatsoever; no shared production contracts may be entered into; no production nor sales value percentages on hydrocarbons or their derivatives may be compromised, nor may profits be shared; no foreign jurisdiction for disputes arising from construction and services contracts in national territory may be agreed upon; and arbitration agreements shall be pursuant to Mexican laws. The Law of PEMEX, introduces changes in the area of contracts, creating a Procurement, Lease, Construction and Services Committee. The PEMEX Board of Directors may approve provisions applicable to PEMEX and its subordinated entities to contract constructions and related services, procurement, leases and services related to substantive activities of productive nature, with prior opinion of the respective Committee. As to substantive activities of productive nature, the Procurement, Leases, Construction and Services Committee shall look into the admissibility of not holding public bids and define the contracting procedure that may be either through restricted invitation or direct award; issue opinions requested by PEMEX Board of Directors on model agreements and contracts in the areas in charge of said committee; issue opinions with respect to entering into agreements and contracts, their execution, suspension, rescission or advanced termination; propose to PEMEX Board of Directors provisions in the area of procurement of goods, leases, service and construction contracting, and sale of goods; and construe, for administrative effects, the aforementioned provisions. Every subordinated entity shall have a Procurement, Lease, Construction and Services Committee, with the same functions, except for proposing and construing PEMEX regulations in these areas. A separate or exclusion regime is established for substantive activities of productive nature, as well as for petrochemicals different from basic activities. Contracting of activities different from substantive activities of productive nature shall be governed by the provisions of laws regarding procurement and construction. The Department of the Public Comptroller and the Internal Bureau of Control shall resolve claims and handle conciliation procedures with bid participants. 7

8 Basic rules are set forth for the PEMEX Board of Directors to issue regulatory provisions in the area of procurement, leases, services and construction contracting, taking into account the content of the support for restricted invitations and direct awards; applying the same requirements to all participants; specifying cases where PEMEX and its subordinated entities shall refrain from receiving proposals or enter into agreements, highlighting that no persons with a conflict of interest or in default with pending obligations may participate with those entities; mechanics to determine prices and adjustments; mechanics for adjustment regarding execution programs, critical dates and completion dates; measures to manage resources in an effective, efficient, transparent and honest manner; determine national content requirements; providing terms and conditions for contracting procedures; setting forth work cost changes pursuant to variation of market and raw material conditions; acknowledge expenses not specified in contract. As to public bids, participation in international bids of nationals of other countries not granting reciprocity may be limited; proposal analysis and assessment is established, including pre-qualification and mechanics for subsequent discount offers; price negotiation stages are included; and new exception cases are added to public bids. Direct awards include spill remediation and incidents that put workers, population, the environment and facilities at risk; certifying public officers, experts and representation in judicial or regulatory processes; spare part supply or services related to equipment of the original manufacturer in order to maintain technical warranty. In the event of restricted invitation, the exceptions include contracting to develop technological innovation 14 ; engineering studies, counseling, advising, research and training. Disqualification cases to participate in contracting procedures or to enter into contracts are provided for. The features of special contracting modes are that the nation s direct domain on hydrocarbons is maintained at all times; no right on oil reserves is granted whatsoever; consideration shall always be paid in cash; no production percentages shall be granted, nor shall profits be shared; and no preferential rights to acquire hydrocarbons shall be granted. Contracts under special contracting modes may not contain shared production schemes or associations in exclusive and strategic areas. They may include provisions that allow the parties to make changes to projects with respect to incorporation of technological advances; market price variation for raw materials or equipment; acquisition of new information obtained during performance of constructions or others that contribute to improve the efficiency of the project; multiannual contracts may provide for revisions required by said hypothesis, which shall be contained in the contract. A possibility to introduce fixed schemes or predetermined formulae to obtain a fixed price is included. 14 Article 53 V e of the Law of Pemex states that procurement guidelines shall set forth cases restricting Pemex and its subordinated entities to contract with persons or entities not authorized to use intellectual property or other exclusive rights. 8

9 On the one hand, sanctions shall be established depending on the negative impact of contractor s activities regarding environmental sustainable development and on failure to comply with opportunity, time and quality indicators. On the other hand, additional compensation may be included in the event economies are obtained from reduced time of performance of constructions or when contractor acquires or is benefited from new technologies, or when circumstances attributable to contractor occur that result in higher profit for PEMEX and a better outcome for a construction or service. H. Support in fertilizer production PEMEX and its subordinate entities shall offer the national fertilizer industry a stable supply plan and long term contracts that reflect fixed prices for this industry s raw materials. Available coverage mechanisms for natural gas pricing shall be used. The use of efficient technologies for ammonia production shall be sought. The plan shall only include nitrogenous fertilizer producers participating in the Program implemented by the Federal Government. I. Final provisions Legal acts entered into by PEMEX and its subordinated entities shall be governed by applicable Federal laws, and national disputes of any nature where PEMEX is a party shall be subject to the venue of Federal courts, unless provided otherwise by an arbitration agreement. As to legal acts of international nature, PEMEX and its subordinated entities may agree to apply foreign law, the venue of foreign courts in trade affairs and entering into arbitration agreements, when this is convenient to better perform their purposes. J. Transitory articles provide for adjustment, timing and condition mechanisms in order to implement the Law. This law shall enter into effect the day after its publication in the Federal Official Gazette (i.e. December 1, 2009). Therefore, the Organic Law of Petróleos Mexicanos and Subordinated Entities has been repealed. PEMEX subordinated entities shall continue performing activities in compliance with their corporate purpose, guaranteeing their commitments until the Federal Executive issues the respective reorganization decrees and determines the applicable provisions based on the Board of Directors proposal. As to professional advisors, the Federal Executive shall have up to 30 days to send its proposals for their designation to the Senate (i.e. December 30, 2008). PEMEX Board of Directors shall be installed no later than 15 working days after the designation of professional advisors occurs (i.e. January 15, 2009).The General Director shall within 180 days after the law becomes effective, submit 9

10 the charter of PEMEX for approval of PEMEX Board of Directors (i.e. May 21, 2009). PEMEX, upon effectiveness of the Law, may draft and send its financing proposals to the Department of the Treasury and Public Credit and make budget adjustments with no need of the Department s approval, except those increasing the ceiling for global expense or regarding the budget that may be corrected with respect to personal services or retirement income. PEMEX may, with no need of approval by the Department of the Treasury and Public Credit, negotiate, take informal or exploratory steps regarding the possibility of going to foreign money and capital markets and undertake external financing. Progressive methods are established in the area of budget with no need of approval by the Department of the Treasury and Public Credit regarding its income and in order to increase its investment, maintenance and operation expenses, without affecting its financial balance sheet based on certain percentages for placement of citizen bonds and compliance with goals set in business planning. Contracts, agreements and other legal acts entered into by PEMEX and its subordinated entities that are in effect on the effective date of this law shall be honored in the agreed upon terms and conditions. PEMEX and its subordinated entities may agree on changes to contracts and agreements in order to adapt them to the provisions of this Law based on guidelines issued by PEMEX Board of Directors.180 days after the effectiveness of the law (May 21, 2009), PEMEX shall establish a strategy to support the development of national suppliers and contractors as part of the Comprehensive Strategic Business Plan. 180 days after the effectiveness of the law (May 21, 2009), PEMEX shall draft an annual plan for purchases from small and middle sized companies and the latter will record all their accounts payable in the Program for Productive Chains of Nacional Financiera S.N.C. (NAFINSA financial agent of the Federal government that contracts credits financed by international financial entities). The Department of the Treasury and Public Credit shall form a fund in NAFINSA 90 days (February 10, 2009) after the effective date of the Law to promote the development of national suppliers and contractors for the State oil industry, paying special attention to small and middle sized companies. PEMEX General Director shall submit for approval of the PEMEX Board of Directors within a maximum term of one year from the date of publication of the Law (November 28, 2009), a restructuring program for PEMEX based on principles of regulatory rationality and efficiency. Once the above program has been approved, PEMEX General Director shall inform Congress of the scope, goals and actions resulting from its application. III.- Additional provisions regarding energy policy A. Reforms to the Organic Law of the Federal Government. 10

11 The functions of the Department of Energy in the area of oil and hydrocarbons are strengthened in the area of energy policy. Drafting of middle and long term strategic plans is emphasized, as well as regulation and supervision for an efficient exploitation of oil fields. B. Law of the National Commission of Hydrocarbons The National Commission of Hydrocarbons is created as a decentralized entity of the Department of Energy with technical and operating autonomy that will support the Department of Energy in the sector s strategic planning regarding the regulatory and supervisory areas of exploration and production in order to guarantee the most adequate use of technology. The purpose of this Commission is to regulate and supervise exploration and exploitation of hydrocarbons in layers or measures, whatever their physical condition might be, as well as to regulate and supervise process, transportation and storage activities directly related to projects of exploration and extraction of hydrocarbons. Its purpose excludes refining, storing, transporting and first hand selling of oil and products obtained from oil refining; manufacturing, storing, transporting and first hand selling of gas; everything related to gas associated to mineral carbon fields; and Manufacture, storage, transportation, distribution and first hand sales of oil and gas derivatives that are likely to be used as industrial raw materials and are deemed basic petrochemicals. Integration and operation: The National Commission of Hydrocarbons shall be formed by a Managing Board made up of 5 commissioners designated by the Federal Executive for a five year time period in a spaced manner and may only be extended once. This Commission may seek support regarding its work activities from technical support committees made up of specialists in their respective areas. Its President shall coordinate works and activities of the Commission. The Commission shall be installed within 90 days following the publication in the Federal Official Gazette and shall take office no later than 180 working days after the effective date of this law (May 21, 2009). The National Commission of Hydrocarbons shall issue its internal regulation within 180 calendar days from its formation. Functions: The National Commission of Hydrocarbons shall examine, assess and verify operations related to exploration and exploitation of hydrocarbons; quantify reserves; and supervise compliance with technical provisions applicable to 11

12 these activities in order to accomplish exploration success and hydrocarbon recovery. C. Reforms to the Federal Law of State-owned Entities A fourth paragraph is added to article 3 stating that PEMEX and its subordinated entities shall be governed by their own laws or creation decrees. D. Reforms to the Law of Public Works and related Services. One paragraph is added to article 1 setting forth that public works and related services regarding certain oil and gas substantive activities of productive nature shall be excluded from application of the Law and be now governed by the Law of PEMEX. 15 E. Reforms to the Government Procurement Law. One paragraph is added to article 1 stating that procurement, leases and services related to certain oil and gas substantive activities of productive nature shall be excluded from application of the Law and be now governed by the Law of PEMEX. 16 F. Reforms to the Law of the Energy Regulatory Commission This law introduces new authority to regulate the area of first hand gas, fuel oil and basic petrochemical sales. The Law of the Energy Regulatory Commission defines first hand sales as the first conveyance that PEMEX and its subordinated entities render in national territory to a third party. It also covers transportation and distribution of products obtained from refining oil and basic petrochemicals through ducts, as well as storage systems related to them or that form part of import or distribution terminals; transportation or distribution of bioenergetics performed through ducts, as well as storage of the same directly related to duct transportation or distribution systems, as well as import or distribution terminals; approving and issuing terms and conditions to be used for first hand sales of fuel oil, gas and basic petrochemicals, as well as methods to determine their prices, unless effective competition conditions exist; approving and issuing terms and conditions applicable to the rendering of transportation, storage and distribution services for fuel oil, gas, basic petrochemicals and bioenergetics. It is deemed necessary to guarantee that the designation of commissioners is made in intervals that guarantee the continuing and independent decisions of the Commission. G. Law for the Sustainable Use of Energy 15 See Article 3 of the Regulatory Law or article 27 of the Mexico Constitution in the Area of Oil for substantive activities of productive nature. 16 Id. 12

13 The purpose of this Law is to foster energetic efficiency with a national and long term perspective. The Law sets forth that public policy shall contribute to safe keep the environment, foster energetic sustainability, and provide relevant information to take productive decisions. As to technical innovation, scientific and technological research, formation of specialists, application of technologies, and the use of efficient equipment, devices and vehicles shall be encouraged. The government undertakes commitments under this Law such as criteria for sustainable development that shall be applied in contracted procurement processes, leases, construction and services; an efficient service that allows systematic improvement of the price/quality relationship; information on the use of energy shall be provided regarding energy production, export, import and consumption by energy type, energy efficiency upon consumption, and measures implemented for energy conservation and their results. Likewise, the modernization of long and short distance public transportation shall be fostered, as well as substitution of incandescent lamps for fluorescent lamps. H. Law regarding the Use for Profit of Renewable Energies and Financing for the Energy Transition This law seeks to use fossil fuels for profit by combining the orientation to renewable energies. The Department of Energy shall foster the use of renewable energy, cogeneration and self-supply of electricity. The national strategy to achieve an energy transition and the sustainable use of energy is based on the drive to use and take profit of renewable energy sources and clean technologies; fostering energy efficiency and sustainability; and reducing dependence on hydrocarbons as the main source of energy. This Law also proposes renewable energies such as eolic, sun radiation, water movement, ocean energy, geothermic and bioenergetics. In order to promote the development of renewable and clean energies, a fund is set up for the fiscal year 2009 in the amount of three billion pesos, and the same amount for 2010 and I. Reforms to the Government Service Charges Law and the Federal Law for Budget and Treasury Liability The reforms to the PEMEX tax regime reduce payments from States and Federal government entities for Federal budget purposes resulting from common fees on hydrocarbons obtained by PEMEX. Their surplus shall be bound to investment in infrastructure and maintenance. The PIDIREGAS plan shall be eliminated for infrastructure projects. Moreover, methods to assess PEMEX investment projects shall be introduced in order to guarantee their profitability. The use of a Stabilization Fund is provided for 13

14 PEMEX infrastructure investment. PEMEX investment expenses shall not be entered in the accounting books for purposes of budget balance. The transitory provisions of these laws provide that long term productive infrastructure projects that have already been approved shall continue being performed under the budget investment mode. No later than January 31, 2009, PEMEX shall acknowledge, as direct public debt for accounting and budget purposes, all loans undertaken by third parties and by financial vehicles guaranteed by the entity related to long term infrastructure projects, and authorized prior to the effective date of the Decree that amends the Budget Law. A formalization of the acknowledgement as public debt shall have to be accomplished within the 2009 fiscal year, being PEMEX able to enter into legal acts related to the acknowledgement and debt service with third parties and financial vehicles. CONCLUSIONS The reform implies a new institutional model of operation for PEMEX and its subordinated entities. A business plan shall have to be drafted for a five year time period, as well as annual operating and financial programs. As to regulatory issues, PEMEX and its subordinated entities shall be governed by its law and regulation, creating a special operating regime in different areas (debt 17, budget 18, contracting 19, etc.). Regarding the areas of debt and budget, ready compliance is established subject to a gradual transition. The entity s corporate governance is strengthened, incorporating professional advisors, a liability regime for PEMEX officers and committees that shall support the functions of PEMEX Board of Directors. With the proposed regulatory framework, there is no doubt that upon entering into or paying for contracts, there is no way to agree upon a percentage on either products, the value of production or profits of PEMEX or its subordinated entities. Likewise, a new scheme for control and rendering of accounts with new players and institutional counterweights is provided. 17 PEMEX is granted more freedom to take on debt and lets PEMEX finance itself using citizen bonds that may only be acquired by Mexican nationals or certain Mexican corporate entities. 18 PEMEX Board of Directors shall approve changes to its budget and the budget of its subordinated entities with no need to obtain approval from the Department of the Treasury and Public Credit. 19 As to contracting, a specific regime is established that gives PEMEX flexibility and a larger operation margin pursuant to needs of the industry. 14

15 Finally, with respects to fertilizers, the reform represents a drive for the agribusiness since it acknowledges that gas is the essential raw material for ammonia synthesis. 15