Competitiveness in the Mexican Market. US / EUROPEAN NETWORK November 21, 2005. Overview. Roberto Arena. Overview. General Information on Mexico Population: 103.8 Million people GDP: 676.5 Billion USD GDP Growth: 4.4% Exports of Goods and Services (GDP%): 30.1
US / EUROPEAN NETWORK
November 21, 2005
General Information on Mexico
Source: World Bank
All data is referred to 2004, except for foreign direct investment, which is referred to 2003.
Main competitors in the international arena:
Some actions taken:
Some actions taken:
Growth Competitiveness Index
Country 2004 2005 Variation (2004-2005)
Finland 1 1 ---
United States 2 2 ---
Sweden 3 3 ---
China 46 49 -3
India 55 50 +5
Mexico 48 55 -7
Brazil 57 65 -8
Source: World Economic Forum
Hot Legal Topics:
Quick Snapshot of Hospitality & Leisure Industry in Mexico
Number of Hotel Rooms Gran Turismo, Five-and Four-Star Hotels Selected Cities in Mexico, 1995 compared to 2004
Occupancy & Average Daily Rates
Selected Cities in Mexico 2004
a) Calculation of mandatoryprofit-sharing
b) Discretional faculties of SEMARNAT
* Environmental risks
* Temporal or permanent suspensions
c) Labor liability derived from outsourcing
Institution that promotes tourism projects through consulting services, financing programs, and sale of real estate
- Minimum Benefits
- Burden of Proof
- Interpretation of Law
Minimum Benefits under Mexican Law:
Recommended Hiring Practices in Mexico:
Proposed Amendments to the Mexican Labor Law:
Jorge San Martin
Marco A. Najera
Mexican Government activities are not monopolies:
Monopolistic Practices Investigations
- Fines up to 900,000 USD.
Control of Concentrations
- Exceeding 50,000,000 USD.
b) Size of transferor + value acquired:
c) Size of transferer and acquirer + value acquired:
- Purchaser shall notifyprior to the implementation in Mexico.
- If FCC does not resolve in deadline,the concentration is cleared.
- Decisions, excluding confidential information, are published by the FCC in website and gazette .
- FCC may impose conditions to approve a transaction which can be proposed by the parties.
- FCC may block a transaction and order the divestiture of the assets concentrated, control elimination and suppression of the operation (in Mexico).
- Fine not exceeding 450,000 USD for failing to notify prior to the transaction.
Proposed Amendments to the FLEC.
• Effective sanctions, including amendments on criminal felony provisions
• Create court procedure dealing with legality
• Increase staff and budget of the Commission
- Enforcement: Mexican IP Institute
- Enforcement: Customs & Tax authorities
* SW industry lost 407 million USD in Mexico in 2004.
* Records, movies, apparel, wine & spirits, HW, books
* Contraband-- 3 months to 9 years
* Piracy-- 2 to 6 years
* Police Operations (Operative Costs)
* Legal work
* Created in 2004 (no record of their actions, if any)
* No cap on liabilities derived from procurement contracts
Although arguably possible, the agreement on a cap of liability under a procurement contract may be construed as a waiver to a “public order” statute; hence, deemed null and void.
- According to official information contained in the 2004-2013 natural gas prospective issued by the Mexican Ministry of Energy, during 2003, while the Mexican economy experienced growth of 1.3%, the natural gas consumption grew at a rate of 8.6% compared to the consumption rate of 2002.
- Since 2003, Mexico stopped exporting and began importing natural gas
- Even though Japan is the world’s largest importer of natural gas, it is estimated that Mexico’s spread between its domestic production and the domestic demand will continue to increase continuously unless drastic investment is made to develop and exploit proved and probable reserves.
- It is also foreseen that in the next ten years the domestic demand for natural gas will experience growth at an annual rate of 5.8%, thus, passing from 5.2 Bcfpd to 9.3 Bcfpd in 2013.
- Likewise, the decline in wells productivity, along with the high technical cost involved in certain regions versus the low productivity of same (Chicontepec), encourages Pemex to intensify the exploratory perforation and development of Burgos Basin and to increase inland and off-shore production in Veracruz. Thus, to set the limits of Lankahuasa field, as well as to build the necessary infrastructure to transport gas from that region to the Natural-Gas-Pipeline National Grid (Red Nacional de Gaseoductos) has become a priority.
- To date, Pemex has already awarded 8 MSC with an estimated investment of 6.3 billion USD with an estimate production of 700 to 800 MCfd by 2008 which would be focused on the Burgos basin.
- Mexico maintains a growing trend on the use of dry natural gas, which has resulted in converting Mexico in the tenth consumer of such natural resource. To date, Mexico’s natural gas reserves are distributed among 10 basins (e.g. Burgos, Salinas/Parras, Tampico-Misantla, Chicontepec, Lankahuasa, Salinas, Chapayal, Macuspana Campeche, and Offshore facilities) estimated as follows:
- Currently the growth of natural gas demand has and is expected to continue to come from the power sector because such plants are using combined-cycle technology.
- To date, Pemex Gas has 10 gas processor complexes, 8 of which are located in the south-southeast region and the other two are in the northeast region.
- To date, CRE has authorized 5 LNG terminals and expects to receive 2 more applications during 2005.
- Mexico’s transportation infrastructure is composed of the Natural-Gas-Pipelines National Grid and the Naco-Hermosillo system, both property of Pemex, with an extension of 9,043 km.
- According to Pemex information, its pipelines are currently saturated. Thus, Pemex has had to use other, more expensive alternatives in order to provide natural gas to its customers.
- Article 27 of the Mexican Federal Constitution (the “Constitution”), under its sixth paragraph, clearly sets forth that the Nation has direct ownership over the oil and all solid, liquid and gaseous hydrogen carbides (jointly “Hydrocarbons”), expressly prohibiting the granting of concessions for their exploitation by private investors.
- Derived from the referred provisions, the Mexican Congress and the executive branch enacted the Regulatory Law of Article 27 of the Constitution in Oil Matters (Ley Reglamentaria del Articulo 27 Constitutional en Material del Petróleo) (the “Oil Law”) and its Regulations, respectively, which constitute the principal laws for Hydrocarbons.
- The Oil Law clearly sets forth that the exploration, exploitation, production and first hand sales of natural gas are reserved to the Mexican government through the State-owned company Petróleos Mexicanos (“Pemex”) and its Subsidiaries.However, the Oil Law also provides that private investors can participate within the activities related to natural gas that the corresponding Regulations authorize.
- To such end, the Executive Branch issued the Natural Gas Regulations (The “NGR”), which provides the general legal framework for the activities that could be performed by private investors once they are duly authorized by the Energy Regulatory Commission (Comisión Reguladora de Energía) (“CRE”). Activities include natural gas storage, transportation and distribution.
- Furthermore, the NGR set forth that the CRE may issue mandatory directives that would regulate safety, construction and prices standards that should be followed by all the individuals holding a permission to perform any of the referred activities.
- CRE permits are granted for a period of thirty (30) years and are renewable.
- It should be noted that the exportation and importation of natural gas does not require prior permission from the CRE, but is subject to the applicable provisions of the Customs Law and Trade Law. Thus, permit-holders are only bound to provide statistical information to the CRE in regards to their trade activities.
Regulation of Prices:
- Natural gas prices are regulated in the Mexican market by the CRE.
- In principle, such governmental body, based on international standards assesses which would be a competitive price for first hand sales of LNG by making reference to the Houston Ship Channel in three particular regions of Mexico.
- Last September President Fox decreed a cap on natural gas prices, temporarily suspending the regulated price mechanism. The preceding was due to the fact that since the unfortunate natural disaster of Katrina the prices went up 35%, passing from 7.25 USD to 9.88 USD.
Challenges & Possible Solutions:
- Pemex is funded through the Federation’s Expenditure Budget (Presupuesto de Egresos de la Federación) which is a statute that is enacted on an annual basis by the Mexican Congress and that clearly obeys political interests. Thus, it is subject to yearly restrictions and limitations.
- Due to the current financial situation of Pemex (its equity balance, liabilities vs assets, and its tax regime), along with the yearly budgetary restrictions of the company’s legal framework, the company is unable to perform the necessary investments, or liaisons that are needed to expand its domestic gas production, strengthen its pipeline infrastructure, or to increase the number and capacity of its pipeline interconnectivity with the border and with LNG terminals.
- Notwithstanding the preceding, Pemex in an effort to increase such exploration and production capacity developed in the past years the Multiple Services Contracts (“MSC”) legal scheme.
- In addition to the referred efforts, acknowledging its lack of capacity to be able to meet domestic demand, Mexico has been promoting the construction of LNG terminals, together with pipeline developments that will provide access to both the Atlantic Ocean and to the Pacific Ocean.
- In order to be able to increase production levels, the government intends to invest in exploration of non-associated petroleum gas reserves at Burgos Basin, and other major potential areas at Lankahuasa basin, as well as to open exploration and exploitation of such natural resources by private investors.
- To such end on September 20, 2005, a bill to amend certain provisions of the Mexican Constitution, as well as to enact new laws was submitted to the Mexican Congressto open exploration and production of non-associated to petroleum gas reserves to private investors, as well as to allow private investment in the transportation of refined hydrocarbon products.
- Likewise, Mexico is currently exploring the possibility of importing natural gas from non US sources, as well as having Pemex invest abroad in order to bypass the current constitutional restrictions.
Gardere, Arena y Robles, S.C. Torre Esmeralda IIBlvd. Manuel A. Camacho No. 36-1802Lomas de ChapultepecMexico City11000MEXICOTel: + (52)(55) 5284-8540Fax: + (52)(55) 5284-8569