Dispute resolution in the new hydrocarbons exploration
Elsa Ortega
Partner at Ortega
& Gómez Ruano
Thanks to the recent amendments in the
energy sector in Mexico, it is now possible
for private companies to participate
in the exploration and extraction
of hydrocarbons (oil and gas). Such activity was
formerly reserved to Petróleos Mexicanos (PEMEX)
as previous State monopoly.
Private companies will now be able to participate
in this sector through exploration and extraction
contracts with the Mexican government,
represented by the National Hydrocarbons Commission
(CNH). This participation is permitted either
individually, or by entering into partnerships
or associations with other private entities, or with
State productive companies (including PEMEX).
The new legal framework allows
the involvement of non-Mexican
entities in this sector requesting
only that they act through commercial
companies incorporated
under Mexican laws.
One important factor that
investors take into account
when considering whether to
participate in these projects, is
the manner in which any dispute
will be settled.
The new Hydrocarbons Law,
enacted in August 2014 (the
“Law”), distinguishes two categories of disputes with their
corresponding dispute resolution
mechanisms:
A.) Disputes relating to the
causes of administrative contract
termination listed in article
20 of the Law must be settled
by Mexican federal courts
The Law provides a list of seven
causes considered serious
under which the CNH could
decide to administratively terminate
a contract. This list is
limited, and the causes are considered
extreme cases, i.e. if the
contractor fails to commence
activities or suspends them for
a period longer than 180 days.
This administrative termination is never automatic.
The Law provides a procedure that the
NHC must follow in order to administratively
terminate a contract, including the possibility
for the contractor to assert its rights and provide
evidence, as well as settle the cause of termination
before the NHC’s decision.
Upon a decision of administrative contract termination,
the contractor shall have the right to
seek the settlement of any dispute related to the
causes of the termination before Mexican federal
courts. Disputes in this subject matter may not be
settled by arbitration.
The explanation is that, although private parties
may now participate in exploration and extraction
activities, under the Mexican Constitution,
hydrocarbons continue to be owned by
the State. Moreover, the ultimate purpose of the
government’s authority to administratively terminate
a contract is to have the ability to recover
without delay the contractual area assigned to
the contractor. The Mexican Congress considered
that arbitration could not ensure such immediate
recovery.
Notwithstanding the aforementioned, the
contractor could have the possibility of initiating
an arbitration to claim the damages and lost
profits resulting from an administrative termination
that has been definitively annulled by
federal courts.
B.) Any other dispute may be settled in arbitration
if the parties agree so
For any other dispute deriving from or related
with these contracts, including conflicts with
respect to any additional cause for termination
or contractual rescission, the Law allows that
the parties agree on alternative dispute resolution
mechanisms, including arbitration, provided
that the applicable laws are the Mexican federal
laws, the process be conducted in Spanish,
and the arbitration award be rendered strictly
according to the law and be obligatory and final
for both parties.
An example of the practical use of these legal
provisions is in sections 23 and 26 of the model
License Contract for the Fourth Invitation to
Bidding on Deep Waters CNH-R01-L04/2015
(whose bidding process is still ongoing) at
http://ronda1.gob.mx/l04-ap-contratos/.