Gas Regulation

For decades, Mexico was one of the few countries that had liberalised its natural gas midstream and downstream industry without liberalising and allowing competition in the production of such fuel. Natural gas production was exclusively reserved to the state through Petróleos Mexicanos and its operating subsidiaries (collectively, Pemex), and except for the natural gas midstream and downstream industry, all of the Mexican petroleum industry (oil, gas, refined products and basic petrochemicals) was subject to a vertically integrated monopoly established in favour of Pemex.

In 1995, Congress passed a bill amending the 1958 Petroleum Law, allowing private participation (national and foreign) in the transportation, storage (including LNG liquefaction or regasification terminals), distribution and marketing of natural gas in Mexico. Originally, such activities were exclusively reserved to Pemex-Gas y Petroquímica Básica (PGPB), one of the four operating subsidiaries of Pemex. In that same year, the Natural Gas Regulations were published by the government, implementing liberalisation. In 1998, new environmental norms calling for the use of low-sulphur fossil fuels became effective, making natural gas the best choice for end users, particularly for industrial customers. A new federal agency was created to enforce the natural gas and electricity laws and regulations: the Energy Regulatory Commission (CRE).

The exploration and production (E&P) of natural gas remained exclusively entrusted to Pemex, and the supply of domestic natural gas within Mexican territory was still monopolised by PGPB, which, in turn, used to compete with private entities in the natural gas transportation and marketing segments. Pemex does not participate in the natural gas distribution business. In 1995, when the government finally decided to use and consider natural gas as an efficient, safe, environmentally friendly fuel, the federal government decided to encourage the use of natural gas not only through the publication of clean air laws and norms, but also through the establishment of local distribution companies (LDCs) legally compelled to gasify a specific geographic zone in Mexico.

In 2008, Congress passed a series of amendments intended to modernise the Mexican oil and gas industry, including the creation of a new federal agency, the National Hydrocarbons Commission (CNH), in charge of regulating and supervising the upstream sector. However, these amendments proved to be insufficient to effectively modernise the Mexican energy sector; thus, in December 2013, Congress made a historical decision by amending the Mexican Constitution to break the government’s vertically integrated monopoly over oil, gas and electricity established for decades in favour of Pemex and Comisión Federal de Electricidad (CFE) (the state-owned national power utility), and open the door for competition in most of the value chains of the Mexican energy industry. This reform has resulted in a large number of statutes and administrative regulations that have substantially changed the structure of the Mexican natural gas sector, as further described in this chapter.

The use of natural gas in Mexico, on the other hand, has been primarily prompted by the power sector over the last 20 years, which has forced an increase in natural gas production, and to that extent has been one of the elements that prompted the recent constitutional changes to open Mexico’s upstream market in light of Pemex’s inability to increase natural gas production. Over the past five years, Mexico met its demand with indigenous gas and imports through pipelines interconnected with the US market and three LNG regasification terminals that were anchored by the CFE. Efforts to increase the production of domestic natural gas have included the commencement of drilling programmes in shallow waters to compensate for the expected decrease of production in the Cantarell field, the initiation of exploration activities in deep waters and the allocation of E&P blocks to private operators under the new legal regime; however, gas imports are expected to continue in the long-term, particularly as a result of the low prices that are now available in south Texas, Pemex’s inability to increase production, and the time that will still be needed to materialise production by private parties.

The CFE, on the other hand, is still the most important promoter of natural gas transportation infrastructure in Mexico, anchoring many of the most important gas transportation pipelines being developed by private companies, including trunk lines and border-crossing pipelines connected at the US-Mexico border, including a huge submarine pipeline from Texas to Tuxpan. For these projects, the CFE has awarded, through competitive bidding processes, long-term firm transportation contracts to anchor the projects and make them feasible. Other important pipelines are now being or have been completed by private developers, including the Los Ramones project, an 855 km, 42-inch pipeline, which is expected to alleviate the lack of transportation capacity in the National Integrated Pipeline and Storage System that resulted in several critical alerts over the past years.

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In 2018, domestic natural gas production was in the order of 4.8 million cubic feet per day (mmcf/d). During the year, natural gas imports represented close to 85 per cent of the total amount of natural gas offered in Mexico. The Ministry of Energy (SENER) anticipates that by 2030, the expected natural gas production will be 3,737.5 mmcf/d, and imports will reach 5,406.9 mmcf/d, all from the US through pipelines, owing to upcoming cross-border infrastructure projects.

The import of natural gas does not require an import permit from SENER (only exports require a permit); anybody may import gas into Mexico. The largest importer-shipper of natural gas in Mexico is Pemex and the CFE. Currently, there are 19 pipeline interconnections across the US-Mexico border, and another interconnection will be commissioned over the next year. No import duties are payable for the importation of natural gas into Mexico.

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Over the past six years, the federal government has intended to foster the participation of the private sector in the natural gas industry, through the implementation of the new mechanisms and asymmetric rules resulting from the Mexican energy reform.

Until now, government policy has been set by the President in compliance with the applicable laws and regulations, through SENER, the CRE and the Ministry of Finance. National energy policy is required to be set within the first six months of the beginning of each presidential term (namely, a six-year term). As a result of the 2013 energy reform, a new Energy Coordinating Council has been created whereby the energy policy established by SENER is communicated to the chair of the CNH and the CRE, as well as the Director General of the National Centre for Gas Control (CENAGAS) and CENACE (Mexico’s power dispatch and control centre); additionally, policy recommendations are required to be made by these regulatory agencies and public instrumentalities. The CRE, through the publication of directives, norms and resolutions, and its regulation of prices, rates and services, is the most important policymaker in the natural gas midstream and downstream arena. The CRE’s directives and norms are administrative regulations that do not require congressional action to be issued (not even presidential action is required); CRE norms include technical standards applicable to the gas industry, and the CRE itself may amend the directives and norms it issues. Such directives currently regulate specific activities such as transportation expansions, gas quality and pricing, rates, insurance, reporting obligations, accounting and asymmetric regulation to Pemex.

As a result of the legal changes introduced in 2014, SENER and the CRE were given broader authority to establish and conduct national energy policy, giving priority to energy safety and diversification, energy savings and protection of the environment. The CNH, on the other hand, provides the technical elements for the design and definition of the national policy on hydrocarbons, participates with SENER in the determination of policies for the restitution of hydrocarbon reservoirs, and establishes technical and safety guidelines and standards for the E&P of domestic hydrocarbons (along with the new National Agency for Industrial Safety and Environmental Protection for the Hydrocarbons Sector (ASEA), as further discussed in question 5). As a result of the constitutional reform passed in December 2013, the CNH has been strengthened and vested with broad powers and authority to regulate the upstream oil and gas sector, and is expected to take a more active leadership role in future years, including the launching of international bids for the award of licences and production sharing agreements (PSAs) to Pemex and private parties.

In July 2016, SENER issued a document containing its public policy guidelines for the implementation of a new natural gas market in Mexico (the Natural Gas Market Policy), which is centred on three main objectives:

• access to reliable and timely market information;
• reservation of transportation capacity and effective open access; and
• effective competition conditions for natural gas marketers.

Furthermore, as part of the implementation of the Natural Gas Market Policy, in 2018, SENER enacted public policies allowing the country to hold strategic and operational inventories intended to ensure the supply of natural gas to the market. Therefore, in March 2018, SENER issued the Natural Gas Storage Policy, whereby the following obligations were established:

• reporting obligations for applicable permit holders; and
• the creation and maintenance strategic and operational inventories.

In order to achieve the foregoing, CENAGAS will be coordinating the efforts to develop the necessary storage infrastructure (through international tender processes) and the implementation of the necessary mechanisms to ensure the energy security in its system.

As further explained in this chapter, important actions are being implemented in line with SENER’s public policy guidelines. Notwithstanding the foregoing, although the new administration has expressed its intentions to reduce the import of natural gas, given that its being considered a matter of national security (which, logically, would require a substantial increase in domestic production), there are certain players associated with the political party of the incoming administration (which holds the majority vote in both houses of Congress) that have expressed their intention to prohibit fracking practices in Mexico, as further explained under ‘Update and trends’.

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Since the state was the only entity allowed to pursue E&P activities in Mexico until very recently, the organisational structure remains controlled by Pemex, and the value of natural gas is directly related to the income obtained from its sale. Nonetheless, Pemex was assisted in the development of the petroleum industry by numerous contractors under various contractual schemes, including incentive-based contracts, under which the compensation for the contractor is set on the basis of performance criteria such as production, productivity and efficiency.

The 2013 constitutional reform and subsequent statutes are aimed at allowing the participation of numerous operators in the E&P business, which represents a historical change in Mexico. For the first time in more than 50 years, Mexican law allows risk contracts for E&P of oil and gas, both onshore and offshore, including PSAs, licence agreements and other type of contracts between the state and Pemex or private operators, as deemed convenient by the federal government in order to maximise the value of the exploitation of domestic hydrocarbons. Moreover, the reform recognises that, provided the agreements are clear that the hydrocarbons remain owned by the state while in situ (in the reservoir), the operators should be able to report in their books their rights to the revenues or to a percentage of the production once it is realised.

Pursuant to the 2013 constitutional reform, Pemex was given the right to a Round Zero, where it was bestowed with certain blocks and areas where it will continue to operate under ‘allocations’ (a sort of E&P concession that may only be granted to state-productive enterprises such as Pemex). Risk contracts for new blocks are being awarded through international tenders by the CNH, primarily on the basis of the consideration offered to the state. Likewise, the CNH shall award, through international tenders, contracts to develop jointly with Pemex some of the blocks originally awarded to Pemex in Round Zero. As of December 2018, 103 blocks have been awarded to private operators under E&P licence agreements or production-sharing agreements, and BHP Billiton has been awarded with the first farm-out with Pemex to develop the deep-water Trion field near the US border, in what constitutes a historic move towards the full reorganisation of Mexico’s oil and gas industry. Additionally, further farm-outs have been awarded to Cheiron Holdings and Dea Deutsche for onshore projects.

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By virtue of the legal monopoly established by the Constitution until 2013, Pemex was the only entity authorised to carry out the E&P of natural gas in Mexico. Nonetheless, as a result of the 2013 energy reform, this monopoly has been abolished, and the upstream industry has now been completely opened to private participation through E&P contracts to be signed with the federal government through a public bid process in which Pemex and private operators are welcome to compete.

E&P activities, on the other hand, are subject to the technical regulation and supervision of the CNH. Drilling and superficial exploration activities not undertaken under an E&P contract are subject to the CNH notification or authorisation.

Moreover, ASEA is in charge of regulating and overseeing the industrial safety and environmental protection aspects of E&P activities, as well as midstream and downstream activities, including the issuance of guidelines applicable to such activities and their enforcement, and the approval and supervision of all sorts of environmental authorisations for the oil and gas industry. ASEA began operations on 2 March 2015.

In addition, Pemex and private operators intending to undertake E&P activities must prepare and file a social impact assessment (SIA) before SENER. The SIA must contain the identification, characterisation, prediction and assessment of social impacts that might arise from the activities to be developed, as well as the relevant mitigation measures and a social management plan. Obtaining SENER’s resolution concerning the SIA is a condition to obtain the necessary environmental impact authorisation from ASEA, and compliance with the recommendations established therein will be required in order to initiate the provision of services in the system. If an indigenous consultation procedure is required, SENER must carry out such consultation in coordination with the Ministry of the Interior.

Finally, E&P contracts include certain compliance covenants and obligations with applicable laws and regulations that, in turn, are issued by the CNH (among other regulators). Thus, in the event a contractor fails to comply with these obligations, it may be subject to steep penalties or, otherwise, an administrative rescission of the E&P contract. The CRE also has certain jurisdiction over E&P contractors since these contractors are mandated to obtain a marketing permit as well (in order to be able to transfer the ownership of the hydrocarbons produced in the relevant block).

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No security or guarantees are required except for those established in the relevant E&P contract.

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For decades, most of the gas transportation pipelines in Mexico were owned and controlled by Pemex, which used to own and operate two pipeline systems: one comprising 8,704km of fully interconnected trunk lines (the National Pipeline System) and another isolated system in the north-western part of Mexico, known as the Naco-Hermosillo system, whose 339km trunk line is interconnected to Kinder Morgan’s pipeline system in Arizona, US. Nonetheless, and since the opening of the midstream industry in late 1995, many other transportation systems have been and are being developed by private players such as Carso Energy, Energy Transfer, Fermaca, Kinder Morgan, Mitsui, Sempra (IEnova), Engie and Transcanada, including private equity funds associated with local developers. Currently, there are approximately 8,610.797km of pipelines, which are expected to increase to approximately 10,000km in the incoming years. Moreover, to promote the expansion of the country’s gas transportation infrastructure, over the past five years the CRE has developed guidelines through which new gas transportation pipelines representing a benefit to the whole pipeline system are allowed to operate in coordination with the National Pipeline System based on roll-in rates, forming the National Integrated Transportation and Storage System (Sistrangas, which is the successor of the National Integrated Transportation System originally conceived by the CRE).

As a result of the 2013 constitutional reform for the energy sector and subsequent statutes, important changes for the natural gas transportation industry have occurred. The most important of those changes is the creation of CENAGAS, a new public instrumentality that is not a subsidiary of Pemex and that has assumed Pemex’s gas transportation assets and operations (including the Sistrangas) with the requirement of managing the Sistrangas. This move is intended to finally afford open access to the National Pipeline System, and the private pipelines that operate in coordination with it, on a non-discriminatory basis and without favouring Pemex’s volumes.

No storage projects (either through salt caverns or exhausted fields) have been implemented yet in Mexico, other than the LNG regasification terminals in Altamira, Ensenada and Manzanillo, which are already in operation; however, ‘guaranty of supply’ (inventory) requirements applicable to gas marketers, transporters and storekeepers (as further explained in question 3) are expected to serve as an important incentive for the development of storage projects.

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To build and operate a natural gas transportation system or a storage facility (eg, liquefaction or regasification terminals), different types of governmental permits and authorisations are required from federal and local authorities, the most important being the permit granted by the CRE, authorisations required under the environmental laws, social impact authorisations and real estate rights required by the project.

Natural gas transportation and storage permits

Pursuant to the Hydrocarbons Law, natural gas transportation services are subject to a federal permit granted by the CRE, upon demonstrating to the agency the experience and capabilities of the relevant transportation company (both technical and financial), the feasibility of the pipeline project to be implemented and the approval of the proposed rates and terms of service.

Transportation permits operate as 30-year renewable quasi-concessions, and impose a series of regulatory obligations on the relevant transporter. As a general rule, transportation pipelines operate under open-access permits granted to those transmission systems that will serve very much like a utility: they are compelled to grant open access on a not-unduly discriminatory basis to any shipper that requests the service, provided there is available capacity in the system and the parties reach an agreement on the subject matter, as provided under the general terms of service (GTS) approved by the CRE. Open-access transportation permit holders are mainly regulated and supervised by the CRE and by ASEA (from a safety and environmental point of view). Self-use transportation permits, on the other hand, are exclusively granted to end users whose transmission systems will not be providing open-access services.

The CRE, as the midstream regulator, has ample powers to establish special conditions for transportation and storage permit holders (including modifying its GTS) in order to ensure that open-access principles are observed. Furthermore, in the event the permit holders fail to comply with the obligations established under the applicable permit, the GTS or applicable law, these entities may be subject to fines or early termination of the applicable permits by the CRE, or both.

There are no restrictions in terms of the length and width of the pipeline or the capacity of the system. Since there are no local utility agencies or commissions in Mexico, the CRE is in charge of granting both interstate and intrastate gas transportation permits.

Transportation companies are not obliged to gasify any predetermined geographic zone or to connect any given number of users. Thus, gas transportation permits are granted by the CRE on a non-exclusive basis.

The regulations for natural gas storage are similar to those applicable to transportation.

The granting of an open-access transportation or storage permit (namely, the approval of the technical and safety aspects of the project, rate schedule and the GTS), takes from five to 10 months, depending on the complexity of the project.

Finally, if the new pipeline is intended to operate as part of the National Integrated Transportation and Storage System, the CRE shall approve the terms and conditions in which the new pipeline shall be integrated into the national integrated transportation system, including the resulting roll-in rates and applicable GTS (which shall be consistent with the GTS of CENAGAS’s national pipeline system).

Environmental and social impact authorisations

The developer shall obtain the authorisation of an environmental impact assessment report and risk study from ASEA, which is responsible for industrial safety and environmental authorisations for the oil and gas industry. Moreover, before filing a permit application with the CRE, applicants are required to prepare and file an SIA with SENER. Likewise, if indigenous communities may be affected by the project, a public consultation procedure shall be carried out by SENER, in coordination with the Ministry of the Interior.

Real estate rights

The developer shall negotiate and obtain all rights of way (ROW), pipeline-crossing authorisations and real estate rights necessary for the construction and operation of the pipeline or the storage facility.

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Through the negotiation and execution of ROW contracts or easement agreements with the respective servient tenements, or through the filing of an ROW permit application if the land is owned by the government. The same applies to securing a site for a storage facility or metering station (namely, option, purchase or lease agreements need to be negotiated, signed, notarised and registered), provided that possession of public land normally requires the granting of a concession, which in some instances is subject to public tender.

ROW contracts and easement agreements depend on the type of land to be affected: private, public or agrarian. Private property in Mexico is subject to state law. Accordingly, the civil codes of the relevant states where the facilities are to be built are the statutes that will govern the terms under which the developer will negotiate the corresponding ROW and real estate rights for the construction of the pipeline or the storage facility (eg, an LNG terminal). Public property is governed by different statutes depending on the type of owner (namely federal, state or municipal owner or public instrument). In this type of situation, and instead of executing an easement agreement, the developer will file and obtain an ROW permit. The ROW permit may be a pipeline-crossing permit or a right-of-way permit, or both.

Agrarian property is subject to federal law under the Agrarian Law. ROWs granted over agrarian property are documented through easement agreements or usufruct agreements; agrarian easement agreements and usufruct agreements are cumulatively subject to the Agrarian Law and the Federal Civil Code.

Under the new legal framework, the process to negotiate and execute the agreements necessary to obtain ROWs has become regulated, requiring, inter alia:

• the involvement of SENER and the Ministry of Agrarian, Territorial and Urban Development (who shall issue model contracts for the use, encumbrance or acquisition of land and real estate rights);
• the participation of social witnesses, if requested by any of the parties or if the social impact assessment shows that there are risk and vulnerability conditions in the relevant area, or if this is otherwise required under the guidelines to be issued by SENER (individuals, entities and NGOs may act as social witnesses, to the extent that they do not have a conflict of interests);
• the obtainment of appraisals; and
• the submission of the relevant agreement for the final validation of a district judge or agrarian tribunal.

Moreover, the Hydrocarbons Law contemplates mediation procedures that the parties may use to resolve their differences where they are unable to reach an agreement. As a general rule, ROWs and any other land rights shall be obtained using the model agreements that SENER has issued for the hydrocarbons industry.

The above-mentioned considerations are similarly applicable to transportation, storage and distribution systems.

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All transportation and storage companies (other than self-use transportation or storage companies) are obliged to provide open access to their systems on a non-discriminatory basis (provided there is available capacity in the system) to any person that requests their services, as required under the relevant GTS.

The GTS is an all-encompassing document, which includes the type of services offered by the transportation or storage company, the terms and conditions regarding the provision of such services (including imbalance procedures and gas quality provisions) and the rates approved by the CRE. Each GTS is available at the CRE, and can only be amended upon the prior approval of the CRE. Issues omitted or not adequately covered under the relevant GTS may be addressed in the gas transportation agreement or the gas storage, regasification or liquefaction agreement (in the case of LNG regasification terminals) entered by the permittee and the user. A template of such agreement is attached to the relevant GTS and incorporates by reference the provisions stipulated under the GTS.

All gas to be injected into a Mexican pipeline (transportation and distribution) is subject to a Gas quality norm published by the CRE. This norm is subject to review every five years.

The rates of transportation and distribution systems are regulated very similarly (see question 16); however, the pipelines that are part of Sistrangas (the national integrated natural gas transportation and storage system, operated by CENAGAS) or some other future integrated system, operate under roll-in rates that are determined based on specific methodologies issued by the CRE.

As previously mentioned, as a result of the 2013 constitutional reform, Pemex’s gas transportation assets and operations have been transferred to CENAGAS, which operates Sistrangas as an integrated open access system. CENAGAS is currently undergoing an open-season procedure, whereby all existing and new shippers will be required to reserve capacity in Sistrangas.

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Transporters and storage companies are required to expand or extend their systems upon request by any potential shipper whenever the service being requested is technically and economically feasible (whether through pipeline expansion, through looping or by adding compression); and the shipper has guaranteed that the services will be contracted. Moreover, the transporter or storage company shall carry out an open season to obtain other requests for service to optimise the use of the expansion capacity. If the transporter decides that it is interested in implementing the requested expansion and covering its cost, the transporter may request an adjustment (increase) of its regulated service rates. If the transporter decides that the requested expansion is not sufficiently attractive, then the shipper that requested the expansion may choose to cover the cost of the expansion or carry out the expansion by itself through the execution of a co-investment agreement with the relevant transportation/storage company, in order to be able to obtain the requested services.

Under the co-investment agreement, the anchor shipper is guaranteed its firm capacity in the system and is allowed to recover its investment through the rates paid by third-party users of the facilities. Nonetheless, these facilities are still subject to open access obligations, and the parties under the co-investment agreement are mandated to increase the capacity of the proposed system in the event any third party shows interest during the relevant open season.

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Gas processing activities are subject to a permit by SENER; it is one of the activities that was liberalised and opened to private investment as a result of the 2013 constitutional reform, which eliminated the state monopoly over the oil and gas industry.

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In principle, gas transportation, distribution and storage service providers shall abide by the terms of service and model contracts established in their respective GTS, as approved by the CRE; however, service providers and shippers may include in their contracts special conditions that detour from the terms of service embodied in their GTS, to the extent those special conditions do not constitute unduly discriminatory practices or violations to public policy. Negotiated rates are also permitted to the extent they are not unduly discriminatory, but as a general rule, negotiated rates shall not exceed the maximum regulated rates approved by the CRE for each system. Moreover, additional flexibility is afforded for gas transportation and storage companies to enter into special conditions with anchor shippers, to the extent they are willing to accommodate the service requirements of other potential shippers interested in receiving services.

In addition, local distribution companies are required to register their model contracts with the Federal Consumer Protection Agency (Profeco), which also verifies the adequacy of the proposed contractual terms.

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Gas distribution is subject to the issuance of a permit by, and supervision of, the CRE.

Both open-access natural gas distribution and transportation companies are regulated by the CRE.

Transporters and distributors (as well as storage companies, retail sellers, marketers, shippers and consumers) are required to abide by the general administrative provisions to be issued by the CRE concerning legal, operational and accounting separation of their activities, codes of conduct, limitations in equity participation, the maximum participation that gas marketers may hold and the maximum capacity they may reserve in transportation pipelines or storage facilities, on the understanding that the direct or indirect shareholders of any gas consumers, producers or marketers that use the transportation or storage services of another company may only participate, directly or indirectly, in such transporters or storage companies when such participation does not affect competition, market efficiencies or effective open access, and only once they have obtained the approval of the CRE and the favourable opinion of the COFECE (Mexico’s antitrust agency).

A distribution permit for a geographic zone designated by the CRE may be awarded by the CRE through an international tender upon request of the federal government, any state or municipal government, the government of the federal district or its subdivisions, or any private party. The CRE has been successful in granting LDC permits since 1996; to date, the CRE has awarded more than 28 LDC permits covering the most important cities in Mexico. The determination, expansion and modification of a geographic zone are established by the CRE in accordance with the CRE’s Directive on Geographic Zones. In all cases, LDCs are private companies, as Pemex does not participate in the gas distribution sector. However, in 2017, the CRE substantially transitioned from the geographic zone allocation to a single distribution zone structure.

Under the new structure, a single geographic zone was created to encompass the entire national territory. Thus, natural gas distribution permits are now granted on a non-exclusive basis (as transportation permits), and permit applicants are no longer required to predetermine the zone where they intend to carry out their services. This new structure is expected to promote competition in the distribution by pipeline sector, by means of reducing entry barriers and the time required to obtain the relevant permit, while also allowing current and future participants to offer more competitive services and rates to the end user.

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See questions 8 and 14.

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Access to the distribution grid is regulated substantially in the same way as access to open-access transportation pipelines (see question 10).

All users accessing a distribution system shall pay the respective LDC the corresponding interconnection fee, which is previously approved by the CRE and included in the relevant GTS, as part of the LDC’s rate schedule. Such rate schedule is published in Mexico’s federal register, and is subject to the adjustment mechanisms provided under the Directive on Pass-through Prices and Rates. According to these mechanisms, regulated rates are subject to annual adjustments based on Mexico-US inflation and currency exchange variations and, after every five years of operation, the rate schedule shall be reviewed by the CRE and the LDC based on the methodology established under the CRE’s Directive on Pass-through Prices and Rates (which includes efficiency factors), considering the business plan, investment commitments, efficiency factors and other considerations included in the distribution or transportation permit. Propane and fuel oil are still, and will continue to be, widely used in Mexico (Mexico is the largest residential consumer of LPG in the world); therefore, the CRE is keen to maintain natural gas transportation and distribution rates at a very competitive level with respect to other competing fossil fuels.

The rate schedule cannot be modified by the LDC unless it has been approved by the CRE. Evidently, the CRE is normally reluctant to accept the modification of a rate schedule unless it is in order to lower such rates; however, the regulation embodied in the Directive on Pass-through Prices and Rates does contemplate a number of cases in which LDCs and transporters are allowed to request an increase of their maximum regulated rates, mainly as a result of regulatory and standardisation changes and unforeseen investments required to protect the integrity of their ROW or the safety of their systems. Changes in the applicable tax regime, on the other hand, are treated as pass-through costs.

Similarly to transportation and storage regulations, distribution permit holders may be subject to penalties or early termination of the applicable permit, or both, in the event the obligations under the permit or applicable law, or both, are not complied with.

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Yes. LDCs have the obligation to expand or extend their grids whenever the requested expansion or extension is technically and economically feasible.

Under the applicable laws, the CRE has broad powers and authority to regulate the efficient development of the midstream and downstream natural gas industry; under such premise, and pursuant to other statutory provisions, the CRE may require an LDC to limit service to existing customers in order to serve new customers. This situation, however, has not occurred yet in Mexico.

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See question 13.

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Gas trading is subject to a permit by the CRE. Gas marketers are only allowed to participate in the equity of a gas distribution and transportation company that such marketer is using to the extent such participation complies with the vertical integration rules to be issued by the CRE (requiring, inter alia, separation of activities, adoption of codes of conduct and restrictions on interlocked directors) and the proposed vertical integration is approved by the CRE, with the favourable opinion of the COFECE. Until June 2017, the price for Pemex’s gas production was regulated by the CRE through pricing methodologies to set Pemex’s maximum prices for domestic and imported gas, which were pegged to a liquid market price index (Henry Hub, HSC and the differential between such reference prices and quotations in south Texas), subject to a netback procedure; however, in June 2017 the CRE eliminated the pricing regulations that were applicable to Pemex’s gas sales, and therefore, the marketing of imported or domestic gas by Pemex or private parties is not currently subject to pricing regulation under Mexican law. However, Pemex’s gas marketing contracts and supply conditions continue being regulated by the CRE.

Pemex continues to be the largest gas marketer in Mexico, mainly because Pemex is currently also the largest producer of natural gas. However, the CFE is also undertaking an important role as a gas marketer supplying natural gas to independent power producers throughout the country.

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Until recently, the oversight of governmental authorities has been negligible, except in the case of Pemex, owing to its evident market power and the fact that it was, for decades, the only producer and supplier of domestic natural gas in Mexico, and is the largest importer, trader and transporter. Pemex’s gas trading activities are currently regulated by and subject to the scrutiny of the CRE through a number of administrative provisions and resolutions intended to limit Pemex’s market power and promote the participation of new marketers. The success of these efforts also depends on a number of other aspects, including CENAGAS’ ability to reorganise the operation of Sistrangas and effectively provide open access to the system.

Gas marketing activities (including wholesale trading and retail transactions) by private parties, on the other hand, are now subject to permit and oversight by the CRE. This marketing permit does not limit the type of transactions that the permit holder may undertake; a permit holder may perform both retail and wholesale transactions upon the issuance of the relevant marketing permit. Moreover, both Pemex and private marketers are required to report detailed information about their gas trading transactions on a daily basis, through the electronic platform that the CRE has implemented for that purpose. These reporting obligations and electronic platform are part of the actions undertaken pursuant to the Natural Gas Market Policy, in an effort to provide adequate and timely information to the market and begin gathering the elements to eventually create a Mexican price index. In this context, the CRE has begun publishing, on a monthly basis, the Natural Gas National Reference Price Index, for informational purposes. This index reflects the average prices of the transaction undertaken by the natural gas marketers participating in the Mexican market.

Finally, as a result of the abolition of the Pemex monopoly over the oil and gas industry and the Pemex obligation to supply the national market, SENER is required to issue the national energy security rules with which gas and liquids marketers will be required to comply in order to participate in the Mexican market. As part of these rules, in December 2017, SENER published, for public consultation, a draft of the Natural Gas Storage Policy, which establishes the guidelines for the creation of strategic natural gas inventories within Mexican territory, to be used in case of supply shortages.

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Domestic gas sales by Pemex are conducted pursuant to the model agreements that have been authorised by the CRE under Pemex’s General Terms and Conditions for First-Hand Sales, which contemplate a series of service methods with different levels of flexibility in terms of gas supply scheduling and nominations. Gas supply contracts among the CFE or other gas marketers and the relevant purchasers are not subject to regulation yet, and, therefore, the parties are free to establish the applicable terms and conditions. Private marketers, on the other hand, are now reviewing their strategies and are often inclined to use North American Energy Standards Board-based contracts (despite that the nature of the model is intended for wholesale or spot transactions).

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No; under Mexican law, all users (wholesale or retail) are free to purchase gas on an unbundled or bundled basis; in other words, users and end users in Mexico are free to purchase from any supplier or marketer, and become shippers in, and retain the service from, any open-access transportation or distribution company, or purchase the natural gas from the distribution company.

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Although Mexico is rich in natural gas reserves, there are no liquefaction export facilities and, because of the increasing demand for natural gas, three major LNG regasification terminals are being operated or developed in Mexico (see questions 1 and 2). Moreover, LNG is now playing a crucial role in CENAGAS’ balancing operations of the Sistrangas, in light of the declining production of natural gas in Mexico (see ‘Update and trends’ for more information). As discussed above, liquefaction and regasification facilities have so far been subject to a storage permit by the CRE; however, new LNG terminals shall operate under the new permit modalities for liquefaction and regasification contemplated by the Hydrocarbons Law, which shall also be granted by the CRE. The design, construction, safety, operation and maintenance of LNG facilities are subject to a Mexican official norm issued by the CRE and ASEA. These three LNG regasification terminals may eventually become liquefaction facilities inasmuch as indigenous production begins to flow and the two large cross-border trunk lines are finally commissioned, allowing the import of continental gas from Texas and displacing expensive LNG imports from the Pacific coast.

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See question 8. Moreover, LNG regasification and liquefaction may require concessions granted by the Ministry of the Environment and Natural Resources and the Ministry of Transportation and Communications if they are not located within a pre-established industrial port.

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The applicant for an open-access gas storage permit is allowed to propose the methodology to be used for purposes of determining the rates that will be charged for the relevant storage services, but this methodology shall be consistent with the general principles followed by the rate methodology prescribed for open-access transportation permits, mutatis mutandis (eg, maximum rates, appropriate allocation of costs among the different services being offered, reasonableness of the proposed rate of return (which is not a guaranteed rate of return), periodic reviews and application of efficiency factors).

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Unlike in some jurisdictions, antitrust matters in Mexico’s natural gas midstream and downstream sectors are not exclusively regulated and enforced by the CRE; the COFECE has concurrent jurisdiction in most of the natural gas activities that may be punishable from the antitrust point of view.

The COFECE has concurrent jurisdiction with the CRE in five areas:

• operation of the system;
• regulated rates, merger control and refusal to deal;
• predatory and discriminatory pricing;
• cross-subsidies, tied sales and exclusive dealings, among other punishable exclusionary practices; and
• cross-participation of gas marketers, producers or consumers in transportation or storage companies (ie, vertical integration rules).

The transfer of an open-access pipeline or storage permit, or the transfer of their assets, is subject to the prior approval of the CRE. Authorisation from the COFECE may also be required if the relevant transaction exceeds one of the monetary thresholds established under Mexico’s merger control rules. Both agencies may object to the transaction or impose conditions or performance requirements on the transfer. Finally, the COFECE may impose sanctions on open-access permit holders and other related parties (eg, an affiliated marketing company) upon determining the existence of a punishable conduct (such as a refusal to deal when the permittee unduly denies open access, or undertakes predatory pricing, imposes tie-in requirements or other kinds of monopolistic practices) causing harm to other economic agents vertically or horizontally located. Since its creation in 1993, the COFECE has gained expertise in the energy sector, and plays an important role in enforcing antitrust laws and regulations in a market that, by its very nature and condition, is per se monopolistic. More importantly, it also plays a significant role because of the unparalleled monopolistic situation that the Mexican energy industry had with two vertically integrated monopolies controlled by the government (Pemex (oil, gas and basic petrochemicals) and the CFE (power)), and the decision to eliminate these monopolies and open the industry up to competition. As a result of a Constitutional amendment, COFECE has become constitutionally independent and one of the most powerful agencies in Mexico.

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Two main sets of rules regulate whether a conduct is anticompetitive in the midstream and downstream natural gas arena: the Hydrocarbons Law and its regulations for the midstream industry (including all of the CRE directives, resolutions, norms and the applicable GTS and rate schedule), and the Competition Law, its implementing regulations and the COFECE’s resolutions. For further discussion, see question 26.

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Both the COFECE and the CRE may preclude or remedy anticompetitive practices in the natural gas sector within the scope of their competence. The main tool is the imposition of hefty fines and criminal penalties (for implicated officers) and, in some cases, even the revocation of the permit on the part of the CRE. In addition, the COFECE or the CRE may require the relevant economic agent or permittee to cease the anticompetitive practice, and the COFECE may even order the divestment of assets. Once such sanctions have been conclusively established by the COFECE, the relevant injured party may use this resolution for a prima facie case for the payment of actual damages and loss of profits before a Mexican court. The sanctioned party may also appeal a resolution imposed by the COFECE before the Mexican courts; alas, precedents indicate that the courts rarely overturn these resolutions (excluding reductions of the relevant fines).

End users, on the other hand, are entitled to cumulatively pursue a claim before Profeco if the pipeline or storage service provider violates the Federal Law of Consumer Protection.

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Mexico’s Competition Law requires that certain mergers or transfers (known in Mexico as concentrations) be notified to the COFECE prior to closing. The transaction legally cannot occur until clearance is obtained from the COFECE. For the purposes of the Competition Law, a concentration includes any transaction or series of transactions that result in the accumulation or concentration of capital from two or more economic agents, and includes mergers, asset and stock acquisitions, as well as the formation of new companies, where the economic thresholds established by the Competition Law are met. The COFECE reviews the power over the relevant market of the parties involved, and the probable anticompetitive effects of the change in control or merger. Typically, the resolution of the COFECE takes two to three months to be issued (although this period is subject to the complexity of the transaction and the relevant market).

The CRE, on the other hand, has in some instances introduced provisions in certain gas transportation permits whereby the CRE’s prior authorisation is required to modify the upstream capital structure of the permit holder. Moreover, mergers or other changes in control that result in a cross-participation among participants in the natural gas market, and mergers or other changes in control that modify the cross-participation previously approved by the CRE, also require CRE approval and the favourable opinion of the COFECE, as previously discussed. In turn, the CRE and the COFECE may impose certain conditions on the relevant economic interest group, including restrictions on: (i) the equity interest that the members may hold among them; (ii) the firm capacity that the marketer may hold in its affiliates’ systems; and (iii) the market share that the marketing entity may have in the relevant sector.

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The purchase cost of a regulated gas utility cannot be included in the price of the service, as the regulated gas utility can only modify its rate schedule under the conditions described in question 16. If an entity acquires a regulated gas utility, said entity must live with its rate schedule and be subject to CRE reviews and adjustment mechanisms.

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Subject to the aforesaid merger control approvals, there is no statutory restriction to acquire the controlling interest in a regulated gas utility, except if the transfer changes or results in the participation of a gas marketer, producer or consumer in the gas utility, in which case, CRE approval and a favourable COFECE opinion are required. Nevertheless, the CRE has in some instances introduced within open-access permits a requirement to obtain the prior approval of the CRE in the event of a change in control of the permittee. Likewise, amendments to a natural gas-related permit requested as a result of a change in control of the permit holder, require the CRE’s prior assessment and approval, which is another way that the CRE has to review a proposed transfer. Moreover, if the participation of a gas marketer is involved, CRE and COFECE approval may be required owing to the regulation applicable to cross-participation situations.

The CRE is keen to make sure that new owners of the utility meet the same technical, financial and legal requirements that the previous shareholders were required to prove to the CRE as part of the approval of its permit. On the other hand, the transfer of an open-access permit, or the assets used to provide the permitted services, requires the prior approval of the CRE and, depending on the characteristics of the transaction, the approval of the COFECE would also be required, and the transfer would then be subject to the requirements established under the Competition Law or the cross-participation rules under the Hydrocarbons Law, or both, as applicable.

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There are no special requirements or limitations on acquisitions of interest in the natural gas sector by foreign companies, except where the foreign company intends to acquire more than 49 per cent of the capital of a Mexican company and the company has more than 16,816,200,000 Mexican pesos in assets, in which case the prior approval of the National Commission on Foreign Investments may be required.

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The North American Free Trade Agreement (NAFTA) provides very general provisions regarding the liberalisation of the energy sector, the use of performance contracts for the exploration and exploitation of oil and natural gas and government procurement rules that may become relevant if providing services or selling goods to Pemex or the CFE. Notwithstanding the foregoing, in light of the recently negotiated trilateral free trade agreement, the United States-Mexico-Canada Agreement (USMCA), some special provisions thereof apply some nuances in relation to NAFTA (for more information, see ‘Update and trends’).

Mexico is a member of the OECD, and is involved in the International Energy Agency through the Committee of Non-Member Countries; as a result, Mexico must follow the policies established by these organisations to the extent permitted by Mexican law. Mexico has signed or ratified more than 32 bilateral investment treaties, 13 free trade agreements (involving 46 countries) with investment protection chapters and 57 double taxation treaties, and is a signatory to the most important regional and multinational treaties on private international law.

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Unlike other jurisdictions, so far, no special permits (eg, a presidential permit) have been required in Mexico for the construction of a border-crossing pipeline, or the import of natural gas (exports, on the other hand, do require an authorisation by the Ministry of Energy). However, if the border crossing is with the US (as is normally the case), the developers must obtain the authorisation of the Mexico-US International Boundaries and Waters Commission. Moreover, an authorisation by the Ministry of Finance is required in connection with the metering devices that will be used to determine the gas volumes being imported or exported. Gas exports, on the other hand, are subject to a permit from SENER.

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No specific affiliate marketing rules have been implemented yet with respect to gas utilities other than the cross-participation authorisation requirements described in question 29. In that context, the CRE now requires that any marketer participating directly or indirectly and at any level in a transportation or storage company establish Chinese-wall rules to prevent undue exchange of information and discriminatory practices.

Other transactions among affiliates, on the other hand, are subject to the general principle of no undue discrimination embodied in the regulations, and the general rules established in the antitrust laws to prevent anticompetitive practices. Under the Hydrocarbons Law, the CRE and the COFECE are required to issue the vertical integration rules that are necessary to promote an adequate legal, operational and accounting separation of the activities undertaken by affiliates in the areas of the natural gas industry.

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This is mainly the CRE, but see questions 26 to 28.

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Following the success of the Natural Gas Release Programme, the CRE restructured and merged the last two phases of the programme into a single final phase, whereby the remaining portion of the 70 per cent mandated release of Pemex’s natural gas supply clientele (around 47.66 per cent) is subject to allocation to a third-party marketer. Current customers are allowed to maintain their natural supply agreement with Pemex (although it is paramount they state their decision in order to avoid the CRE from choosing a marketer for them).

In light of the pronounced decline of indigenous natural gas production in Mexico, CENAGAS is currently strongly enforcing liquidated imbalances to the users of its system. This is translating into steep penalties for imbalances, since CENAGAS is being obligated to resort to the injection of expensive LNG in order to maintain the operational balance in the Sistrangas. Furthermore, Pemex (the main natural gas marketer in Mexico) is reducing the maximum daily quantities under existing natural gas supply contracts since Pemex is unable to accommodate all of its commitments. This has resulted in a complicated choice for end users: either (i) reduce consumption or (ii) cover the steep penalties imposed by CENAGAS (since in Mexico, the majority of natural gas marketers (including Pemex) pass through all imbalance charges to customers), especially considering that CENAGAS calculates the imbalances using the LNG market price.

With regard to the distribution sector, the CRE published two sets of regulations for public consultation: (i) the General Administrative Provisions on Development of Systems, Open Access and Provision of Services of Pipeline Distribution of Natural Gas (Distribution Services GAPs); and (ii) the General Administrative Provisions that specify the Rates’ Methodology of Pipeline Distribution of Natural Gas (Distribution Methodology GAPs). The proposed Distribution Services GAPs establish, among others, the criteria that LDCs must follow with regard to open-access principles and implementation of electronic bulletins (similar to the regulation in place for transportation services). On the other hand, the Distribution Methodology GAPs establish the criteria that LDCs shall observe for the implementation of maximum rates in the provision of their services. Among others, the Distribution Methodology GAPs provide that the rates for firm services shall comprise: (i) a capacity charge; (ii) a use charge; and (iii) a service charge. Moreover, the LDCs shall also provide information to the CRE on their costs and access, which the CRE may in turn use to adjust the maximum rates in the event it determines that the LDC obtained a higher margin than the limit of maximum profitability (which is also set by the CRE).

Mexico held its presidential elections in 2018, in which left-wing Andres Manuel Lopez-Obrador (a candidate of the opposition party to the administration that enacted the energy reform) won by an ample margin. Thus, there is a probability that the Mexican energy policy will shift for the next six years (the length of a presidential term in Mexico).

With regard to the new administration, its energy team has sent mixed signals to the markets concerning the national supply of gas. On the one hand, the energy team has acknowledged that Mexico’s dependency on natural gas imports is a national security risk and that the indigenous production of gas should be fostered; however, the strategy that the next administration intends to pursue to achieve this is still unclear. Despite Mexico’s large unconventional shell reserves (ie, 141.5 TCF, representing 65 per cent of the country’s prospective natural gas resources), the president has repeatedly stated in the media that hydraulic fracturing (fracking) would be prohibited under his administration. This has resulted in the CNH having to cancel (among others) the Round 3.3 tender for unconventional reserves. Furthermore, the new president has implied in the media that further bids for the award of exploration and extraction contracts of hydrocarbons will be indefinitely suspended until ‘current E&P contracts bring results’, which together with the fracking prohibition and the message of ‘make Pemex great again’, renders unclear the strategy the new administration will implement to lessen Mexico’s dependency on natural gas imports (although suggestions have been made that the new administration intends to strengthen Pemex’s role in the Mexican E&P sector).

Moreover, a mayor policy shift is expected to occur at the CRE-level. Notwithstanding that the applicable regulation is structured in a way in order to grant the CRE certain level of immunity to withstand changes of the presidential regime (ie, the CRE’s commissioners are appointed for seven-year terms that may only be revoked for serious offences); four out of the seven commissioners who comprise the CRE’s governing body have now or are expected to leave the CRE in the coming weeks (either through resignations or because their applicable term has elapsed). Thus, the President will be allowed to propose to the Senate (which he controls through its political party, MORENA) its candidates to fill the vacant commissioner positions, which, in tandem, will allow him to carry out MORENA’s political agenda with regard to the midstream energy sector through SENER and the CRE (jointly).

Despite NAFTA, the governments of Mexico, the Unites States and Canada have recently entered into the USMCA, a new free trade agreement that will repeal and replace it. The USMCA brings some notable changes that impart some nuances in relation to the original regulation under NAFTA. There is a new energy chapter whereby Mexico states its direct, inalienable and imprescriptible right to the ownership of its hydrocarbons; Canada and the United States recognise Mexico’s right to amend its domestic legislation in this regard. This does not necessarily translate into an unchallengeable right of Mexico to modify its legislation in prejudice to foreign investors despite the rights of the other parties of under the USMCA; on the contrary, any modification in prejudice to foreign investors would still be subject to the remedies established under the USMCA. However, several investor protections are arguably being reduced in the USMCA (ie, most investors will not be able to bring a claim for breach of the ‘minimum standard of treatment’). Notwithstanding the above, most of these limitations will not apply to disputes related to host government oil and gas contracts, and certain investors (such as Canada) may have remedies under other free trade agreements (eg, the Trans-Pacific Partnership). The USMCA is currently under internal review by each of the respective parties, and its entry into force would effectively repeal and replace NAFTA (although some provisions in the published version of the USMCA seem to suggest the implementation of a transitory regime).

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