Oil as a reserved activity and with specific regulations in the Foreign Investment Law
THE WAY THE OIL MARKET WORKS
On the side of the international market oil supply, we can find companies like Saudi-Aramco from Saudi Arabia, NIOC from Iran, KPC from Kuwait, INOR from Irak, ADNOC from The United Arab Emirates, NOC from Libia, NNPC from Nigeria, PDVSA from Venezuela and Pemex from Mexico, which presumably represents 80% of the oil reserves, 40% of the production and 60% worldwide oil exportation transactions. All of them mostly state property and whose governments, except Mexico, are OPEC members. On the demand side, we find specialized intermediaries (traders), refining companies, speculators, risk managers and oil companies themselves. It’s important to realize that the importance of big American and European multinational oil companies (previously “the seven sisters”) has gone down, by controlling today only near 5% of oil reserves, 12% of production and 20% of refining capacity.
PART OF THE NATIONAL LEGAL FRAMEWOR
Mexico’s Political Constitution (February 5th, 1917).
-Article 25th (Fourth and fifth paragraph): The public sector will be exclusively in charge of the strategic areas described in Constitution’s 28th article, fourth paragraph. The Federal Government will always have the ownership and control of the organizations that might establish. Likewise, it will be able to take part by or with the private and social sectors, according to the law, to drive forward and organize the main development areas.
27th Article (fourth and fifth paragraph): Talking about oil and solid, liquid or gas underground hydrocarbons, the Nation’s property is inalienable and essential and no concessions will be granted. With the purpose of getting incomes for the State so they contribute to the long-term Nation’s development, it will take care of the exploration activities and oil and else hydrocarbons extraction through assignations to productive State companies or through contracts between them or individuals, under the Regulatory Law terms. To fulfill the goal of such assignations or contracts, the State productive companies will be able to agree with individuals. In any case, the underground hydrocarbons are Nation’s property, and that must be asserted in the assignations or contracts.
73rd article (XXIX-F section, about the Congress faculties): The Congress has the faculty to: … XXIX-F. Issue laws aimed at promoting the Mexican investment; regulate the foreign investment, technology transfer, and production, dissemination, and use of scientific and technological knowledge that the national development requires.
In this way:
FOREIGN INVESTMENT LAW (DECEMBER 27th 1993)
5th Article (IV section related to the activities reserved for the state): The functions exclusively reserved for the State are those determined in the following strategic areas: … Oil and hydrocarbons exploration and extraction, in terms of what’s written in the 27th article, seventh paragraph, and 28th article, fourth paragraph of the Mexican Political Constitution and the corresponding regulatory Law.
HYDROCARBONS LAW (AUGUST 11th 2014)
3rd Article. – According to what establishes the 25th Article, fourth paragraph, 27th Article, seventh paragraph, 28th Article, fourth paragraph of Mexican Political Constitution, the Nation will carry out the hydrocarbons exploration and extraction; under this Law terms.
Hydrocarbons Exploration and Extraction in cross-border deposits described in this Law’s 1st Article could be carried out under the terms of the treaties and agreements Mexico is part of, entered into by the President and ratified by the Senate.
PART OF THE INTERNATIONAL LEGAL FRAMEWORK.
- NORTH AMERICAN FREE TRADE AGREEMENT (OJF December 20th-21st 1993).
The North American Free Trade Agreement establishes in its Annex III, about the activities reserved to the State, a list under which Mexico reserves the exclusive right about nuclear power production and refuses to authorize the investment establishing in the following activities:
A Section. Activities reserved to the Mexican State. Mexico reserves the exclusive right to carry out and denies to authorize the investments establishment to the following activities: 1. Oil, Other Hydrocarbons, and Basic Petro chemistry (a) Activities description (i) Natural gas and crude oil exploration and extraction; natural gas and crude oil refining and processing; and artificial gas production, basic petrochemicals, and its consumables and ducts; and (ii) foreign trade; transportation, storage, and distribution, up to, and including first hand sale of the following goods: crude oil, natural and artificial gas; goods under cover of Chapter VI (Energy and Basic Petrochemicals) obtained from crude oil and natural gas processing and refining; and basic petrochemicals.
B Section. Deregulation of activities reserved to the State 1. The activities established in A Section are reserved to the Mexican State and private’s capital investment is forbidden under the Mexican law. If Mexico allows the participation of private investments in such activities through service contracts, concessions, loans or any other kind of contractual act, can not be interpreted that through such participation is affected the State reserve in those activities. 2. If Mexican Laws are amended to allow private capital investment in the activities pointed out in “A” section, Mexico may impose restrictions on the foreign investment participation notwithstanding what it is pointed out on the 1102nd article, having to indicate them on Annex I. Mexico also may impose exceptions to the 1102nd article (national treaty) regarding to the foreign investment participation in case of assets sale or taking part in a company’s capital involved in the activities pointed out on “A” section having to indicate them on Annex I.
In this way, the activities qualified as strategic are only oil and other hydrocarbons exploration and extraction, and can’t be stipulated that have the same nature, functions like the ones described in Hydrocarbons National Commission law clause 2 sections 1 to 4.
- Are apart of the object: I. Refining, storage, transportation, distribution and first-hand sales, of oil and products obtained from its refining.
- Manufacture, storage, transportation and first-hand sales, of gas.
- Everything related to the gas linked to coal deposits, and
- Manufacture, storage, transporting, distribution and first-hand sales of those oil and gas byproducts that might be used as basic industrial raw matter, and are basic petrochemicals.
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 In financial economics, a trader is a person or entity that buys and sells financial instruments (shares, bonds, commodities, financial derivatives, etcetera), as, intermediary agent, speculator, arbitrager or hedging operator. A trader can work on its own, in an investment fund, in a bank (wholesale bank, Corporate & Investment Banking) or other financial entity.
 Each one of the Parties will grant to other Party’s investors a deal no less favorable than the one they grant, in similar circumstances, to their own investors in relation to establishing, acquisition, expansion, management, conduction, operation, sell or other provisions of the investments.
 Annex I, Reserves in relation to existing measures and liberalization commitments.