On July 12 2017 a joint venture (consortium) formed by three
participants, a Mexican, an American and a British company,
announced its first discovery of oil reserves made in the
The finding was made in the Zama-1 well, which is a shallow
field situated at a depth of 166 meters and approximately 60 km
away from the port of Dos Bocas in the State of Tabasco. The
finding was made nearly two years after the consortium was
awarded the license to explore Block 2 (located in Veracruz)
and Block 7 (where the Zama-1 well is located) during the first
round of public biddings that was held in July 2015. Both the
blocks are located in the shallow water Sureste Basin in the
Gulf of Mexico, the most productive hydrocarbon region in the
According to the terms that were agreed, the Mexican
government will receive a 68.99% profit share from every barrel
produced in the block. This amount could increase after
considering taxes and fees.
Earlier this year, on March, an Italian company announced
that after having drilled the Amoca-2 well it was able to
affirm that the well had proven reserves of oil. The Amoca-2
well is located in a shallow field (it lies at a depth of 25
metres) and is located approximately 200km west of Ciudad del
Carmen in the Bay of Campeche.
Later on, in mid-July, the same Italian company announced
that the Amoca-3 well has proven to have multiple oil reserves.
The Amoca-3 well is also located in a shallow field and is
situated approximately 3km from the Amoca-3 well.
The Amoca-2 and Amoca-3 wells are in Block 1, which was
awarded to the referred Italian company in the second round of
public biddings held by the Mexican government back in 2015.
The Mexican government will receive a 83.75% profit share from
every barrel produced in this block.
The aforementioned announcements were made following the
first drillings to be carried out by organisations other than
the state-owned company Petróleos Mexicanos (PEMEX)
since President Lázaro Cardenas expropriated all oil
resources and facilities from foreign investors in 1938, nearly
80 years ago. Also, such findings derived from the first
exploratory drilling processes that were made since Mexico
allowed private investors to participate in its oil and gas
industry as a consequence of the long-awaited energy reform
that was passed in December 2013.
The discoveries that were made in the Zama-1, Amoca-2 and
Amoca-3 wells seem to indicate that the first offshore
exploration processes made by private companies since the
Mexican government allowed foreign investors to participate in
the energy sector have turned out to be successful.
The 2013 and 2014 legal reform
In late 2013, the Mexican government, under the current
administration, materialised a series of long awaited and much
needed legal reforms that had, among other purposes, to
encourage the country's exploitation of hydrocarbons and
ultimately bring to an end the monopoly for the exploration and
exploitation of hydrocarbons that had been held by PEMEX.
The reform that was passed in December 2013 aimed to attract
private domestic and foreign investment into the energy sector
for the first time since 1938, in order to eventually lower
electricity and fuel prices. Another purpose of the reform was
to modify the tax regime applicable to PEMEX and transform it
into a state productive company, to be operated in the same
manner as a privately owned company seeking at every moment to
maximise its profits.
In a first stage, such modifications entailed material
amendments to the Mexican constitution. Such modifications led
the Mexican government to allow private investors to
participate in the hydrocarbons and electric industries. These
initial amendments were followed by a set of secondary laws
that entered into force in August 2014.
Indeed, as part of the first set of amendments, articles 25,
27 and 28 of the country's constitution were amended in order
to allow private investors to participate under contracts or
permits in most areas of the oil, gas and electricity sectors.
However the Mexican state continued to be the legal owner of
resources located beneath the soil's surface.
Later on, the president sent Congress a bill proposing the
enactment of nine laws and the reform of 12 previously existing
laws which altogether constituted the secondary legislation.
The secondary laws were finally published in the Official Daily
and came into force on August 11 2014. Such secondary
legislation aimed to update the applicable legal framework of
the hydrocarbons and electricity sectors, specify the functions
to be performed by different government agencies, and regulate
environmental and social issues commonly faced by such
As a consequence of the legal framework that was laid out
through the amendments to previously existing legislation and
the enactment of new legislation, private Mexican and foreign
persons were allowed to participate in the exploration and
extraction of hydrocarbons under four types of contracts.
The options of contracts that became available were: i)
service contracts (which already existed); ii) shared
production contracts; iii) shared profit contracts; and iv)
license contracts. The possibility to utilise a combination of
the aforementioned four options was also allowed.
Service contracts are agreements whereby a private company
sells the hydrocarbons that it extracts to the Mexican
government at a price stipulated in the corresponding
Shared production contract agreements allow the contractor
to keep in-kind production that covers costs and their share of
operating profit and then to deliver the remaining production
to a trader appointed by the Comisión Nacional de
Hidrocarburos (the CNH).
In shared profit contracts contractors will deliver the
entire contractual production to the trader and the latter, in
turn, will deliver income derived from the commercialisation of
the production to the Mexican Oil Fund, which will assume
responsibility to pay the contractor, the consideration that
may apply in accordance with the contract.
Finally, license contracts would be granted through a
bidding process to be conducted by the CNH, allowing the
contractor to have a right to the minerals it extracted after
paying a variety of fees to the Mexican government.
Rounds of public biddings
The first public bidding processes to exploit the available
fields or blocks commenced in 2015, and the granting of such
licenses was designed to be carried out throughout five rounds
to be held between 2015 and 2019, in which private investors
are allowed to bid for the right to exploit fields that prior
to the reform only PEMEX was allowed to exploit.
Through the first of such rounds (round zero) PEMEX was
awarded the right to exploit specific areas in an exclusive
manner. After the initial round PEMEX was able to retain areas
in which it already operated, and it was awarded 83% of proven
and probable reserves of the first round. The subsequent rounds
were open to private companies and for partnerships with
Round one commenced in December 2014 and the first phase of
round two began last June. These initial rounds encompassed
shallow water, terrestrial and deep water reserves, and onshore
blocks. The next auctions, in deep water and for shale blocks,
are expected to be held at the end of this year or at the
beginning of 2018.
As mentioned above, a set of secondary laws were enacted, in
which it was proposed that PEMEX would be regarded as a
taxpayer and, at the same time, lower its fiscal burden. In
such secondary laws the authorities enacted the Hydrocarbons
Revenue Law and the Regulations to the Hydrocarbons Revenue
Law, the principal purpose of which was to lay out a regime in
which the Mexican state will receive income derived from the
activities of exploration and extraction of hydrocarbons
carried out through the assignments and contracts to exploit
the available fields. Furthermore, it was established the
contractors should also comply with the Mexican income tax
The Hydrocarbons Revenue Law includes a ring fencing
mechanism establishing that the bidding terms for the contracts
and the contract itself may only be formalised with state
productive companies or legal entities that comply with some
requirements such as: i) they should be Mexican residents for
tax purposes; ii) their purpose should consist exclusively of
the exploration and extraction of hydrocarbons; and iii) they
should not pay taxes under the optional integration regime for
groups of companies.
Derived from the hydrocarbons exploration and extraction
activities, the Mexican state could be able to receive income
from different government fees, rights and/or compensations, as
well as from income tax derived from the activities carried out
by the contractors.
In this regard, the companies should recognise their income
in accordance with the provisions established in the Mexican
Income Tax Law and in the amount established in their contract,
and should pay, according to their contract, certain amounts,
which should be deductible for income tax purposes.
On matters related to the depreciation of investments for
income tax purposes, the depreciation procedure based on the
straight line method is maintained. However, in the
Hydrocarbons Revenues Law specific deduction percentages may be
applied instead of applying the percentages set forth in the
Mexican Income Tax Law on: investments made for the
exploration, investments made for the development and
exploitation of oil fields and natural gas applicable to
upstream activities, and investments made in some midstream
infrastructure related activities.
Considering that in deep water projects for the exploration
and extraction of hydrocarbons production usually begins after
several years, taxpayers engaged in the aforementioned
activities may offset tax losses incurred in a tax year,
against profits, if any, realised in the following 15 tax
years, instead of the 10 tax-year term set forth in the Mexican
Income Tax Law.
Additionally, it is noteworthy that according to the
provisions contained in the Mexican Income Tax Law that were
already in force prior to the enactment of the energy reform,
the thin-capitalisation restriction provided for Mexican
resident legal entities with respect to interest derived from
loans granted to them by foreign resident related parties, does
not result in being applicable with respect to debt acquired in
connection with upstream activities related to oil and other
Foreign residents engaged in the activities referred to in
the Law of Hydrocarbons in Mexico would be considered to have a
permanent establishment when such activities are carried out
for more than 30 days in any 12-month period. For this purpose,
activities carried out by related parties in respect of the
same project are included.
The reform allowed for the possibility of participating in
contracts of this sector by means of the concept of a
consortium. This concept consists of two or more productive
companies of the state and/or ordinary legal entities jointly
filing a proposal within the bidding process for the awarding
of the contract, with no need for incorporating a specific
purpose entity for such purpose.
The concept of consortium does not have any legal capacity
for purposes of tax law, other than that of the associates
thereof, thus endowing this legal concept with complete tax
In terms of VAT, the Hydrocarbons Revenues Law establishes
that the compensations will be taxed at a zero rate.
Consequently, the contractors should recover the VAT
transferred to them on the expenses and investments carried
out, in order to execute the projects.
What to expect
Despite the slump in oil prices in the past two years, as it
was demonstrated through the findings that have recently been
made in shallow water fields, the development of Mexico's
offshore oil and gas resources has increased. Such a positive
result has certainly been constructed based on the legal
framework that was laid as a consequence of the 2013 and 2014
It can be expected that the already available legal
framework along with a gradual market recovery, will continue
to allow achieving the goals of the country's energy reform, as
the new rules have certainly allowed clarity as to the
obligations and conditions that all participants in the
industry are subject to.
Chevez, Ruiz, Zamarripa y
Vasco de Quiroga 2121
4º Piso, Peña Blanca Santa Fe
CP 01210 México
Tel: +52 (55) 5261-5670
Samy Lazarov joined Chevez, Ruiz, Zamarripa y
Cía in 2002 and became a partner in 2015. His
areas of expertise include the development of tax
strategies and restructuring for Mexican and
non-Mexican corporations, including M&A
transactions, oil and gas, energy and infrastructure
projects, participation in IPOs and other investment
instruments. He is involved in cross-border planning as
well as on tax wealth planning for high net worth
He is a public accountant who graduated from the
Universidad Iberoamericana. Currently, he is a
member of the College of Public Accountants of Mexico
and of the Mexican Institute of Public Accountants.
He is also member of the Mexican Branch of the
International Fiscal Association (IFA) and of the
Society of Trust and Estate Practitioners (STEP).
He has published several articles in national as
well as international publications on taxation.
Chevez, Ruiz, Zamarripa y
Vasco de Quiroga 2121
4º Piso, Peña Blanca Santa Fe
CP 01210 México
Tel: +52 (55) 5257-7098
Bernardo Iberri is an associate at Chevez, Ruiz,
Zamarripa y Cía in Mexico City. He is
specialised in federal taxation matters in Mexico, with
an emphasis on cross-border transactions and investment
Bernardo is a public accountant from the
Instituto Tecnológico Autónomo de
Mexico (ITAM) in Mexico City, where he took a
postgraduate course in corporate advisory. He holds a
master's degree in international taxation from the
University of Sydney and took a postgraduate course in
energy law in Escuela Libre de Derecho in