Source: INTERNATIONAL -REPORT by Curtis, Mallet-Prevost, Colt & Mosle pp. 4-6, September

1995

The New Regime for Transmission and Distribution of Natural Gas in Mexico

Under the Mexican Constitution, the Mexican state owns all hydrocarbons located in its territory, and the

exploitation of such resources is reserved exclusively to the Mexican Government. The scope of that

monopoly is established through the definition of the term "petroleum industry" in the Ley Regla-

mentaria del Articulo 27 Constitucional en el Ramo del Petroleo (the "Petroleum Act"). Whatever falls

within the "petroleum industry" is within the exclusive province of the Mexican State; whatever falls

outside is open to private investors.

On April 29, 1995, the Mexican Congress adopted a new law, proposed by President Ernesto Zedillo, that

amended the Petroleum Act to permit the private ownership of pipelines for the transmission and

distribution of gas, thereby enabling the private sector, both Mexican and foreign, to participate in these

activities that had previously been within the exclusive jurisdiction of the State and were carried out by

Pemex Gas y Petroquimica Basica ("Pemex Gas"), a subsidiary organ of Petroleos Mexicanos. The new

law, entitled Decreto por el que se reforman diversas disposiciones de la Ley Reglamentaria del Articulo

27 Constitucional en el Ramo del Petroleo (the "Decree"), did so by limiting the definition of "petroleum

industry," in the case of gas, to the exploration, exploitation and processing of gas and only to those

transportation and storage functions necessary to move the gas from the wellhead to the processing plant

(which includes gathering). The Decree was published in the Diario Oficial (ed., NLCIFT) on May

11,1995.

Pemex Gas retains the exclusive right to make the first sale of domestic production, subject to regulation

by the Ministry of Energy when the Federal Competition Commission determines that free market

conditions do not exist, although private parties are authorized to import gas for sale within Mexico. In

this respect, the Decree implements the NAFTA provision providing buyers of gas in Mexico with the

opportunity to contract directly with U.S. sellers of gas.

To carry out the distribution and transportation of gas through pipelines, private parties must obtain the

prior authorization of the Ministry of Energy through the issuance of the appropriate permit and grant

open access to third parties, subject to the terms and conditions established by the Ministry of Energy. The

detailed terms and conditions of the various permits, as well as their duration, are not specified in the

Decree, and no restrictions are placed on the right of foreign companies to obtain such permits. (The

sole prohibition against foreign involvement ap- plies only to foreign governments and states.)

The Decree provides that the construction of pipelines is of public utility (Article 10 of the Petroleum

Act), which means that land and personal property may be expropriated by the Federal Government to

carry out pipe- line construction. Under the Expropriation Law, the Mexican Government has

wide powers to impose limitations on private property, including expropriation, so long as there exists a

"public purpose" (utilidad pública) and compensation is granted to the affected party, either by the

government or by the person benefiting from the limitation or expropriation.

The "open access" nature of pipelines is referred to throughout the Decree (Articles 10, 13,111, and 14,1,

(d) of the amended Petro- leum Act), but the details of the regime will not be established until the

implementing regulation has been issued. It is important to note, however, that this obligation of

open access is not limited to new pipelines constructed by private parties, but also extends to the existing

network of pipelines owned by Pemex Gas.

Article 14 of the amended Petroleum Act provides that the regulation will also deal, at a minimum, with

procedures to grant, transfer and revoke permits; terms and conditions of "first-hand sales" by Pemex

Gas (ventas de primera mano); terms and conditions of the provision of transportation, distribution and

storage services; procedures for public hearings; procedures for arbitration regarding contract disputes

(including refusal to deal); and the monitoring of compliance by permit holders with the requirements of

the Petroleum Act, its future implementing regulation and the terms of the permits.

The Decree provides the following grounds for revocation of permits: (i) failure to exercise the rights

granted by the permit within the period of time specified therein; (ii) interruption of services without the

authorization of the Ministry of Energy; (iii) discrimination against users, or violation of the tariffs

or prices established by the authority where the Federal Competition Commission has declared

competition does not exist (otherwise prices and tariffs will be established by market forces); (iv)

transferring the permits in violation of the law; and (v) failing to comply with the Normas Oficiales

Mexicanas i.e., administrative rules issued by the Mexican Government) or the provisions of the permit.

The Decree grants sole jurisdiction to the Federal Government over the distribution, transportation and

storage of natural gas (Article 9 of the amended Petroleum Act), and characterizes those activities as

commercial acts. Therefore, to the extent that an issue is not covered by the Petroleum Act or its

implementing regulation, it will be governed by the Commercial Code (Article 12 of the

amended Petroleum Act).

The Ministry of Energy, with the participation of the Energy Regulatory Commission (the "Energy

Commission"), is charged with the responsibility of applying the Petroleum Act. The Energy Commission

is an existing agency, classified as an órgano desconcentrado (i.e., a public agency that, although part of a

ministry, enjoys ample autonomy) of the Ministry of Energy. The role of the Energy Commission is to be

specified in the implementing regulation (Article 16 of the amended Petroleum Act).

Any violation of the Petroleum Act or the implementing regulation is subject to a fine ranging from 1,000

to 100,000 times the minimum general daily wage in Mexico City at the time the violation takes place (at

present, the minimum general daily wage in Mexico City is approximately 3 U.S. dollars).

By: Mark H. O'Donoghue Santiago

Gonzalez-Luna M.

Mexico City.