• 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/.