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January 17, 2020

Mexico upstream fiscal and regulatory guide

By GlobalData Energy

GlobalData’s latest fiscal and regulatory report, ‘Mexico Upstream Fiscal and Regulatory Guide’ indicates that the administration of President Lopez Obrador is expected to clarify to foreign investors whether it intends to close the door on international investments in the oil and gas sector after in December 2018 it cancelled new licensing rounds until at least 2022.

Mexico Congress modified some articles of the Hydrocarbons Revenue Law reducing Pemex’s profit sharing duty from the current 65% to 58% in 2020 and then to 54% in 2021. Reducing the profit sharing duty may help Pemex to obtain liquidity and fund its obligations currently jeopardised by negative free cash flow and high debt.

With no planned licensing rounds, service contracts migrations, and farm-outs, the government is looking to rely on Pemex for upstream development. The Ministry of Finance and Public Credit has set a target oil-production increase of 12.9% in 2020. Pemex is offering new integrated service contracts to support development, but it will retain operatorship and contractors will receive a cash fee based on production.

Mexico issues PSAs for new shallow-water licences. Licensees pay price-based royalties, the hydrocarbon activity tax, exploration rental fees, and the ISR (income tax) at 30%. In addition, the PSAs require a minimum state share of profit oil, which is a biddable element in the PSA licensing rounds while the final production sharing splits are based on a pre-tax IRR mechanism. Similar to royalty and tax licences, PSAs were offered in the period 2015-2018 through regular licensing rounds.

Mexico also issues royalty and tax licences for new onshore blocks and deepwater blocks. Under this regime, licensees pay price-based royalties, the hydrocarbon-activity tax, exploration rental fees, the ISR at a 30% rate, and an additional royalty. The latter is a biddable element in the royalty and tax licensing rounds, and it may be adjusted according to a mechanism based either on the licensee’s profit or production. Royalty and tax licensees may require to pay a signature bonus. As with PSAs, royalty and tax licences were offered in the period 2015-2018 through regular licensing rounds.

Pemex assignment regime concerns all blocks assigned to Pemex via Round Zero. Pemex pays price-based royalties, the profit-sharing duty, the hydrocarbon-activity tax, exploration rental fees, and the ISR at a 30% rate.

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