The energy industry around the world has its eyes on Mexico as the country implements constitutional and legislative reforms that are set to open its energy industry up to private investment for the first time in 75 years. The Peña Nieto administration and Mexico’s regulatory agencies face challenges as they begin to implement the reform. Many questions remain unanswered, including fiscal conditions in the contracts, fees for the work, the quality of the support infrastructure yet to be built and local content requirements.
Meanwhile, questions from potential investors center on local content requirements and the state’s first competitive bid round.
The Hydrocarbons Law went into effect in August 2014. In articles 46 and 126, the law states that companies holding contracts for the exploration and production of hydrocarbons should use in their operations a minimum percentage of domestic content.
The minimum percentage to be met for 2015 is 25 percent, which will gradually increase to 35 percent in 2025. This measure excludes deep- and ultra deepwater projects, the minimum percentage for which will be determined on a case-by-case basis.
Many questions remain unanswered, including fiscal conditions in the contracts, fees for the work, the quality of the support infrastructure yet to be built and local content requirements
On Nov. 13, 2014, the Ministry of Economy published an agreement establishing the methodology for measuring local content based on five principles, with consideration on criteria that does not generate undue advantages, which may affect the competitive position of assignees or contractors.
The Origin of Goods and Services
Goods comprises the value of Mexican goods used by the producer, including the proportion of domestic materials incorporated into the goods and excluding the value of imported materials as well as the value of materials produced locally but do not qualify as Mexican. There is an option to consider the total cost of a material when it is not possible to determine the value.
Services includes the value of property used, the leasing of property, salaries or fees paid to domestic workers employed by the service provider, and subcontracted services.
Local labor force includes the value of wages, salaries, fees and benefits paid in Mexico to national workers, according to the number of man-hours incurred in the activities.
Training includes the value of training to national workers granted by the assignee or contractor.
Investment in local physical infrastructure includes the value of the total expenditure incurred in the territory in order to improve the urban and rural environment (including construction and maintenance of highways, roads, bridges and public transit routes, hospitals, schools, housing, drinkable water supply systems, sanitation and drainage, public and sports parks).
Transfer of Technology includes building and operational costs of research and development centers related to the sector, the value of patents, and financing new techniques and technologies in the hydrocarbon sector.
Note that the contracts will require contractors to incorporate in their plans for exploration and development a local content compliance program, including deadlines and stages, which will be reviewed by the National Hydrocarbons Commission with input from the Ministry of Economy.
Monetary sanctions for noncompliance with the percentages of required local content are provided. Payment of contractual penalties through the Mexican Petroleum Fund for Stabilization and Development are equivalent to a percentage of the value of the concepts outlined in the methodology. Such sanctions may gradually increase each year.