Alert - Energy Sectorial Program

On July 7th, 2020, the Ministry of Energy ("SENER") published in the Federal Official Gazette ("DOF") the Energy Sectorial Program 2020-2024 ("PSE").

The objective of the ESP is the "Rescue of the Energy Sector" through the strengthening of the two State Productive Companies ("EPEs"), which are, Petroleos Mexicanos (“Pemex”) and the Federal Electricity Commission ("CFE"), as well as the planning and orientation of the Institutional Programs of the decentralized administrative entities, the parastatal entities and the Coordinated Regulatory Entities in Energy Matters (“OCRs”) (CNH and CRE), to align them with the current government's energy strategy, through the establishment of six priority objectives, which, are composed of priority strategies and actions.

The six priority objectives established by the ESP are the following:

1. To achieve and maintain sustainable energy self-sufficiency to meet the energy demand of the population with domestic production.
2. To strengthen the EPEs as guarantors of energy security and sovereignty, and as levers for national development in order to trigger a multiplier effect in the private sector.
3. To organize the scientific, technological and industrial capacities that are necessary for Mexico's energy transition throughout the 20th century.
4. To raise the level of efficiency and sustainability in the production and use of energy in the national territory.
5. Ensure universal access to energy, so that all Mexican society has access to it for its development.
6. To strengthen the national energy sector so that it constitutes the basis for promoting the development of the country as a power capable of satisfying its basic needs with its resources, through State, social and private productive enterprises.

Although the ESP covers both the Oil & Gas sector, as well as the Electricity sector, this document will focus on analyzing the possible effects on the Oil & Gas sector, through the approach of the strategies contemplated in the ESP.

The ESP focuses its content on the new model of energy development that should prevail in Mexico, which is a response to the problems brought by the administration of the previous governments. This model is referred to as "sustainable energy self-sufficiency".

The main effects on the Oil & Gas sector are the following:

• National Content

The PSE mentions that, during the last administration, the Ministry of Economy did not clearly follow up on the National Content for Petroleum Entitlements and Exploration and Production Contracts (E&P Contracts"), although the document does not establish an explanation of how it failed to do so. Likewise, it is expected that the percentage of National Content will be increased, and the current parameters used for its calculation will be revised by modifying the formulas for the calculation of National Content.

This could imply an amendment to the E&P Contracts provisions or additional guidelines in order to determine what is understood as 'national content', since the current guidelines are ambiguous to say the least.

• Exploration and Production Activities

The PSE is considering increasing hydrocarbons exploration and production activities, although there is no mention of new bidding rounds or future farmouts, or the resuming of the CNH-R03-L02/2018, CNH-R03-L03/2018 and CNH-A6-7 Asociaciones/2018 bidding rounds.

The cancellation of the bidding rounds and farmouts that were being carried out in previous years, means that in the future if those procedures are resumed, there could be a significant delay in oil production for the period in which it was decided not to continue with the rounds.

The PSE aims for increased investment in exploration activities in onshore and shallow-waters areas through Pemex, but there is no mention of whether this will be through bidding rounds, Pemex will carry out such activities on its own or establishing a new method in which the private entities can participate in this activities.

The cancellation of the bidding rounds not only impacts the oil & gas industry. Other sectors are involved in the exploration and production activities, including the maritime sector, which provides most of the offshore equipment (vessels, oil rigs, drilling rigs) to perform the drilling activities, as well as other service providers.

• ORC aligned with the policy of rescuing the national energy sector.

This point refers to the transformation of the OCRs for them to meet the objectives of the new administration. This is already in process, and it has happened since the change in the commissioners of the OCRs, through the appointment of persons more aligned with the ideology of the new government. This has resulted in the dismissal of a large number of public officers to comply with the austerity policy, as well as in the delay of a large part of the proceedings before them. This leads to the delay of projects in both the oil & gas and electricity sectors that could benefit the Mexican energy sector.

• Promote through public policies the efficient development of hydrocarbon and oil markets to guarantee the supply in the national territory.

It is important to analyze this point, since due to the strengthening and rescue of Pemex, the aforementioned public policies could create a monopoly in the markets, giving preference to the procedures entered before the OCRs and creating a system in which private investment is reduced due to the preference for Pemex. It is clear that the ESP as a document could be more specific around the role and involvement of the private sector.

The priority objectives contained in the ESP do not establish a clear methodology for their fulfillment and only remain as a statement of the current government's ideology. It will be important to keep a close watch to all modifications to the regulations of the different sectors in order to understand how this plan will be implemented.

Should you have any questions or comments, please do not hesitate to contact us.

Garza Tello-Clyde & Co.