Local content requirements for E&P companies doing business in Mexico could gradually rise from 25% next year to 35% by 2025 if changes approved in a bill by the Mexican Senate receive blessings from the country’s lower house and president.
However, the requirement—which is up from the originally proposed 25% by 2025—would not apply to deepwater and ultra-deepwater projects, an area in which state-run Pemex lacks technical expertise. Realizing the challenges associated with local ability in this area and the need for advanced technology, the bill states that a different target will be established for deepwater and ultra-deepwater activities.
The amended local content percentage came following dialogue from different sectors and would be subject to review every five years after 2025. It is among the details outlined in the draft energy bill, one of four bills making their way through the legislative process that will set the framework for energy-related activity in the country following a December 2013 historic vote that opened the sector to private investors. The three other bills are expected to be debated throughout the weekend and possibly into early next week before moving on to the lower house for a vote.
Jose Valera, a partner with the Mayer Brown law firm, called the higher local content percentage very sensible.
“With respect to areas in which it would apply, there would be some qualifications such as the availability of local workforce. Another qualification that is normally allowed is that the local content cost must not exceed by certain threshold the cost otherwise available from foreign suppliers,” Valera said. “I would presume that that would also be available here, although they are not making it explicit yet in the draft law.”
But a big piece of the puzzle is missing—details about the hydrocarbon revenues law. Valera said this part originates in the house, where members have not been as forthcoming publicly with information or proposed changes as their counterparts in the senate.
“We still don’t have the full picture. We’re all touching different parts of the elephant here, and we don’t realize what we’re touching,” Valera said, noting that information about the fiscal framework is needed. “By fiscal framework I don’t mean taxes. I mean the contract consideration payable to the state by the oil company.”
The finance ministry will be responsible for establishing the economic and fiscal terms of the E&P contracts, which include license, production-sharing, profit-sharing and service contracts. The constitutional reform establishes that the law shall provide that “maximizing the nation’s revenues” is to be the guiding principle in implementing this framework, according to Mayer Brown’s analysis of the proposed hydrocarbon legal regime.
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