Relevant Environmental Legal Aspects of the Energy Reform in Mexico By Héctor Herrera 1

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1 Environmental Alert Relevant Environmental Legal Aspects of the Energy Reform in Mexico By Héctor Herrera 1 I. CONSTITUTIONAL AMENDMENT IN THE AREA OF ENERGY January 9, 2015 On December 20, 2013 it was published in the Official Daily of the Federation 2 the EXECUTIVE ORDER that amends and adds various provisions of the Political Constitution of the United Mexican States, in the Area of Energy. 3 The order became effective on the day after its publication in the above-mentioned Official Daily, amending articles 25, 27 and 28 regarding: a) The planning and control of the national electric power system, as well as the public service of transmission and distribution of electric power; and b) The exploration and extraction of oil and other hydrocarbons. During 2014 relevant laws and regulations were enacted as well as amendments regarding the environmental legal regime for the energy sector en Mexico. With respect to the activities referred in paragraph a) above, in accordance with the Executive Order of reference, no concessions shall be granted to private companies or individuals, however the Mexican State is authorized to execute agreements with private companies in the terms to be established in the laws, to participate in other activities of the electric power industry. With respect to the activities referred in paragraph b) above, in accordance with the Executive Order of reference, no concessions shall be granted to private companies or individuals. The Mexican State shall carry out those oil activities by means of the granting of allotments to productive companies of the State 4 or through agreements with the latter or with private companies in terms of the Regulatory Law. In the Executive Order of reference, in our opinion, there are three relevant environmental legal issues: (i) sustainability of economic activities; (ii) use of cleaner technologies and fuels; and, (iii) the creation of the National Agency for Industrial Safety and Environmental Protection of the Hydrocarbons Sector. 1 Environmental Law Practitioner. Admitted in Mexico. Partner of the Environmental Practice Group of the Law Firm Haynes and Boone, S.C. in Mexico City. Member of the Environmental Law Commission of the Mexican Bar Association [ Barra Mexicana, Colegio de Abogados, A.C. ]. 2 Diario Oficial de la Federación. 3 DECRETO por el que se reforman y adicionan diversas disposiciones de la Constitución Política de los Estados Unidos Mexicanos, en Materia de Energía. 4 Empresas productivas del Estado.

2 Environmental Alert A. Sustainability of Economic Activities Although the first paragraph of article 25 of the Mexican Constitution made reference to the sustainable development before this amendment, it was added in order to include it again in the sixth and eighth paragraphs of said article in the following terms: Under criteria of social equity, productivity and sustainability, companies of the social and private sector of the economy shall be supported, submitting them to the modalities of the public interest and to the use, for the general benefit, of the productive resources, taking care of its conservation and the environment The law shall encourage and protect the economic activity carried out by the private sector and shall provide the conditions in order for the activities of the private sector to contribute to the national economic development, promoting the competitiveness and implementing a national policy for the sustainable industrial development that shall include the sectorial and regional flows, in terms of that set forth in this Constitution The General Law on Ecological Balance and Environmental Protection defines sustainable development as follows (Art. 3º fraction XI): The assessment process with criteria and indicators of environmental, economic and social character, aim to improve the quality of life and the productivity of the persons, based on the appropriate measures of preservation of the ecological balance, 5 environmental protection and use of natural resources, in such a way that the satisfaction of the needs of future generations is not compromised Article 25 is located within the First Title, Chapter I Human Rights and its Guarantees, of the Mexican Constitution, therefore it is interesting that the human right of economic activities of the private sector must be encouraged and protected by law, including the promotion of the competitiveness and the implementation of a national policy for the sustainable industrial development, in such a way that, if the Mexican State does not comply with that and it affects that competitiveness and sustainable industrial development, then the Mexican State could violate a human right affecting the economic activity of a private company and, therefore, an Amparo trial 6 could be carried out with the aim of stopping the violation to the human right in the manner that might correspond in each particular case. The Twentieth Transitory Article of the Executive Order of reference sets forth that within the next 120 calendar days, counted from the date in which such Executive Order becomes effective, Congress shall carry out the corresponding legal amendments to regulate the productive companies of the State, and shall establish, at least that: 5 Ecological balance. The interdependence among elements that are part of the environment that makes possible the existence, transformation and development of mankind and other living beings. Art. 3º, paragraph XIV of the General Law on Ecological Balance and Environmental Protection. 6 Trial for the protection of constitutional rights. 2

3 I. Its purpose be the creation of economic value and increase the income of the Nation, with sense of equity and social and environmental responsibility The environmental responsibility referred to in the above paragraph, as part of the purpose of the productive companies of the State, suggests that legislation to be enacted by Congress to regulate those companies shall include provisions to strengthen the environmental provisions applicable to the electrical power and hydrocarbons sectors. The Seventeenth Transitory Article of the Executive Order of reference confirms that stated in the above paragraph, in the following terms: Within the next three hundred and sixty five calendar days after this Executive Order becomes effective, Congress shall carry out the corresponding changes to the legal framework, in order to establish the basis in which the State shall provide environmental protection in all of the processes related to the area of this Executive Order, regarding the activities of the productive companies of the State, private companies or both, by means of the integration of criteria and best practices in the areas of efficiency in the use of energy, reduction of the generation of greenhouse gases and other elements with greenhouse effects, efficiency in the use of natural resources, low generation of wastes and emissions, as well as the lowest carbon footstep in all of their processes. In the area of electricity, the law shall establish to the participants in the electrical power industry, obligations of clean energies and reduction of polluting emissions B. Use of cleaner technologies and fuels The Eighteenth Transitory Article of the Executive Order of reference sets forth the commitment of the Federal Executive to include a strategy of transition to promote the use of cleaner technologies and fuels in the following terms: The Federal Executive through the corresponding Secretariat in the area of Energy and within a term no longer than three hundred and sixty five calendar days counted from the date in which this Executive Order becomes effective, shall include, in the National Program for the Sustainable Use of Energy, a strategy of transition to promote the use of cleaner technologies and fuels. Within the term provided in the fourth transitory article of this Executive Order, 7 Congress shall enact a law with the aim of regulating the reconnaissance, exploration and exploitation of geothermic resources for 7 That is, within the 120 calendar days after the Executive Order became effective. 3

4 the use of the energy of the subsoil within the limits of the national territory, with the aim of generating electric power or destine it to various uses C. The creation of the National Agency for Industrial Safety and Environmental Protection of the Hydrocarbons Sector The most relevant environmental amendment in the Executive Order of reference is the creation of a federal regulatory agency, part of the Secretariat of the Environment and Natural Resources [ SEMARNAT ] which will be in charge of regulating and supervising the industrial and operational safety as well as the environmental protection, the facilities and activities of the hydrocarbons sector, in the terms of the Nineteenth Transitory Article of said Executive Order which reads as follows: Within the term provided in the fourth transitory article of this Executive Order, Congress shall carry out the amendments to the legal framework in order to create the National Agency for Industrial Safety and Environmental Protection of the Hydrocarbons Sector, as a federal regulatory agency of the corresponding Secretariat in the area of Environment, with technical and management autonomy, which will dispose of the income, deriving from contributions and public revenues that the law will set forth for its services, to finance a total budget that would allow to comply with its authority. The Agency shall have within its authority, the ability to regulate and supervise, in the area of industrial and operational safety as well as environmental protection, the facilities and activities of the hydrocarbons sector, including the activities of dismantling and abandonment of facilities, as well as the comprehensive control of wastes The content of said transitory article suggests that there will be not only a specialization of the federal environmental authority that will supervise the facilities and activities of the hydrocarbons sector, but also a specialization of the environmental legal framework applicable to that sector. II. SECONDARY LAWS DERIVED FROM THE CONSTITUTIONAL REFORM IN THE AREA OF ENERGY As a consequence of the constitutional reform of reference, on August 11, 2014 it was published in the Official Daily of the Federation, 8 the following Executive Orders: a) Executive Order by means of which it is issued the Law of Income on Hydrocarbons, are amended, added and derogated various provisions of the Federal Law on Duties and the Law of Fiscal Coordination and it is issued the Law of the Mexican Fund of Oil for the Stabilization and Development. 9 8 Diario Oficial de la Federación. 9 Decreto por el que se expide la Ley de Ingresos sobre Hidrocarburos, se reforman, adicionan y derogan diversas disposiciones de la Ley Federal de Derechos y de la Ley de Coordinación Fiscal y se expide la Ley del Fondo Mexicano del Petróleo para la Estabilización y el Desarrollo. 4

5 b) Executive Order by means of which are amended, added and derogated various provisions of the Federal Law on Budget and Fiscal Responsibility and the General Law of Public Debt. 10 c) Executive Order by means of which it is issued the Law of Electric Power Industry, the Law on Geothermic Energy and are added and amended various provisions of the Law on National Waters. 11 d) Executive Order by means of which it is issued the Law of the Coordinated Regulatory Entities in the Area of Energy; are amended, added and derogated various provisions of the Organic Law of the Federal Public Administration and, it is issued the Law of the National Agency of Industrial Safety and Environmental Protection of the Hydrocarbons Sector. 12 e) Executive Order by means of which it is issued the Law on Hydrocarbons and are amended various provisions of the Foreign Investment Law; Mining Law, and Law of Public Private Associations. 13 f) Executive Order by means of which it is issued the Law of Petroleos Mexicanos [ PEMEX ] and the Law of the Federal Commission of Electricity, and are amended and derogated various provisions of the Federal Law on Governmental Entities; the Law on Acquisitions, Leasing and Services of the Public Sector and the Law on Public Works and Services Related with Same. 14 In all of the laws referred in a) to f) above, environmental legal provisions were included, although most of them are only references to: (i) the Law of the National Agency of Industrial Safety and Environmental Protection of the Hydrocarbons Sector; (ii) the Federal Law on Environmental Liability; 15 the General Law on Ecological Balance and Environmental Protection; 16 and (iii) in general to the environmental liabilities for damages to the environment. 17 The Law of the National Agency of Industrial Safety and Environmental Protection of the Hydrocarbons Sector undoubtedly is the most relevant environmental reform of the package of reforms in the area of energy, and for that reason we will focus now on that law. 10 Decreto por el que se reforman, adicionan y derogan diversas disposiciones de la Ley Federal de Presupuesto y Responsabilidad Hacendaria y de la Ley General de Deuda Pública. 11 Decreto por el que se expiden la Ley de la Industria Eléctrica, la Ley de Energía Geotérmica y se adicionan y reforman diversas disposiciones de la Ley de Aguas Nacionales. 12 Decreto por el que se expide la Ley de los Órganos Reguladores Coordinados en Materia Energética; se reforman, adicionan y derogan diversas disposiciones de la Ley Orgánica de la Administración Pública Federal y, se expide la Ley de la Agencia Nacional de Seguridad Industrial y de Protección al Medio Ambiente del Sector Hidrocarburos. 13 Decreto por el que se expide la Ley de Hidrocarburos y se reforman diversas disposiciones de la Ley de Inversión Extranjera; Ley Minera, y Ley de Asociaciones Público Privadas. 14 Decreto por el que se expiden la Ley de Petróleos Mexicanos y la Ley de la Comisión Federal de Electricidad, y se reforman y derogan diversas disposiciones de la Ley Federal de las Entidades Paraestatales; la Ley de Obras Públicas y Servicios Relacionados con las Mismas. 15 Ley Federal de Responsabilidad Ambiental published in the Official Daily of the Federation on June 7, Became effective the day after its publication. 16 Ley General del Equilibrio Ecológico y la Protección al Ambiente published in the Official Daily of the Federation on January 28, Last amendment published in that Daily on January Administrative, civil and/or cirminal liability. 5

6 III. LAW OF THE NATIONAL AGENCY OF INDUSTRIAL SAFETY AND ENVIRONMENTAL PROTECTION OF THE HYDROCARBONS SECTOR On August 11, 2014 it was published in the Official Daily of the Federation, 18 the EXECUTIVE ORDER that issues the Law of the Coordinated Regulatory Entities in the Area of Energy; amends, adds and derogates various provisions of the Organic Law of the Federal Public Administration and issues the Law of the National Agency of Industrial Safety and Environmental Protection of the Hydrocarbons Sector, 19 which Executive Order became effective the day after its publication in the above-mentioned Daily. A. Purpose of the Law of the National Agency of Industrial Safety and Environmental Protection of the Hydrocarbons Sector The purpose of this Law is the creation of said Agency, hereinafter the Agency, as an entity of the Secretariat of the Environment and Natural Resources, with technical and management autonomy. 20 The purpose of the Agency is the protection of the people, the environment and the facilities of the hydrocarbons sector through the regulation and supervision of: (i) industrial safety and operational safety; (ii) dismantling activities and abandonment of facilities; and (iii) the comprehensive control of the wastes and polluting emissions. 21 In accordance with Article 2 of this Law, the Agency in the exercise of its authority must take into consideration that set forth in the General Law on Ecological Balance and Environmental Protection, the General Law for the Prevention and Comprehensive Management of Wastes, the General Law on Sustainable Forestry Development, the General Law on Wild Life, the Law on Biosafety of Genetically Modified Organisms and other applicable provisions. 22 Please note that such provision does not expressly include the Law on National Waters 23 nor the recent Law on Spills in the Mexican Marine Zones, 24 despite the fact that a very important part of the exploration and extraction of hydrocarbons will be carried out within the Mexican marine zones where relevant environmental impacts might occur. It seems that the environmental protection of the hydrocarbons sector by the Agency is only referred to the comprehensive control of wastes and polluting emissions, without including the pollution to national waters (fresh waters and marine waters) despite their importance. If this is correct, then the National Water Commission and the Secretariat of Marine would continue as the corresponding authorities for water pollution but not the Agency of reference. If the intention was to create an Agency to regulate and supervise the environmental aspects of the hydrocarbons sector, it is not clear why that Agency was not granted authority in the area of prevention and control of pollution of national waters provided in the Law of National Waters and the Law on Spills in the Mexican Marine Zones. 18 Diario Oficial de la Federación. 19 DECRETO por el que se expide la Ley de los Órganos Reguladores Coordinados en Materia Energética; se reforman, adicionan y derogan diversas disposiciones de la Ley Orgánica de la Administración Pública Federal y, se expide la Ley de la Agencia Nacional de Seguridad Industrial y de Protección al Medio Ambiente del Sector Hidricarburos. 20 Law of the National Agency of Industrial Safety and Environmental Protection of the Hydrocarbons Sector. Article Idem. 22 Ibidem Article Ley de Aguas Nacionales, published in the Official Daily of the Federation on December 1, Last amendment published in said Daily on August 11, Ley de Vertimientos en las Zonas Marinas Mexicanas published in the Official Daily of the Federation on January 17, Became in effect 180 days after its publication. 6

7 B. HYDROCARBONS SECTOR For purposes of this Law, by hydrocarbons sector the following must be understood: The reconnaissance and superficial exploration, and the exploration and extraction of hydrocarbons; 2. Treatment, refining, transfer, commercialization, transportation and storage of petroleum; 3. The processing, compression, liquefaction, decompression and regasification, as well as the transportation, storage, distribution and the selling to the public of natural gas; 4. Transportation, storage, distribution and selling to the public of liquefied gas of petroleum; 5. Transportation, storage, distribution and the selling to the public of petroliferous, and 6. Transportation by pipelines and the storage, linked to pipelines of petrochemicals deriving from the processing of natural gas and refining of petroleum. C. Supplementary Laws In that not provided by this Law, it shall apply in a supplementary manner the provisions contained in the Hydrocarbons Law, the General Law on Ecological Balance and Environmental Protection, the General Law for the Prevention and Comprehensive Management of Wastes, the General Law on Sustainable Forestry Development, the Law of Biosafety of Genetically Modified Organisms, and the Federal Law of Administrative Procedures. 26 Bear in mind that the Law on National Waters and the Law on Spills in the Mexican Marine Zones were not included. D. Authority of the Agency Article 5 of this Law sets forth a long list of the authorities of this Agency, among those authorities most relevant include the authority to regulate and to supervise: (i) the industrial safety and operational safety; (ii) dismantling activities and abandonment of facilities; and (iii) the comprehensive control of the wastes and polluting emissions. The Agency has authority to issue, suspend, revoke or deny the licenses, authorizations, permits and registrations in the area of environment referred in Article 7 of this Law. E. Management System The Agency shall establish rules in order for the regulated parties to implement Management Systems for the activities they carry out, including the standards, actions, responsibilities and those in charge of the industrial safety, operational safety and environmental protection, 27 in accordance with that set forth in Article 13 of this Law. 25 Law of the National Agency of Industrial Safety and Environmental Protection of the Hydrocarbons Sector. Article 3, paragraph XI. 26 Ibidem Article Ibidem Article 12. 7

8 F. Safety (Preventive) Measures The Agency may impose the following measures: Suspend works related with the construction of works and facilities; 2. Temporary, total or partial closure of facilities or systems; 3. Order the temporary suspension of the supply or the service; 4. Secure substances, materials, equipment, accessories, pipelines, facilities, systems or vehicles of any kind, and 5. Disable substances, materials, equipment or accessories. Said measures will apply when a work or facility represents Critical Risk in the area of industrial safety, operational safety or environmental protection. Critical Risk is understood to imply an imminent danger and requires immediate action to reduce it to acceptable conditions without limit on the cost for its solution. 29 G. Legal Actions Resolutions of the Agency can be challenged through an administrative remedy in accordance with the Federal Law on Administrative Procedure, or through a trial for annulment in accordance with the Federal Law on Administrative Contentious Procedure. H. Sanctions The Agency may impose sanctions to the violations provided in Article 25 of this Law with fines between 7,500 and 7.5 million times the daily minimum wage in effect in the Federal District (that is up to 525 million Pesos MxCy, approximately US$36,206,897), at the moment of the violation. To impose those fines the Agency must take into account the seriousness of the violation, the economic conditions of the violator, recidivism, the intentional or negligent character of the action or omission that generates the violation, and the direct benefit obtained. 30 In case of recidivism the amount of the fine could be up to double the original amount imposed, as well as the definitive closure of the facilities. 31 IV. OTHER RELATED LEGAL PROVISIONS On October 31, 2014 the following legal provisions were published in the Official Daily of the Federation: 1. Interior Regulations of the National Agency on Industrial Safety and Environmental Protection in the Hydrocarbons Sector. 2. Executive Order that amends and adds various provisions of the Regulations to the General Law on Sustainable Forestry Development. 28 Ibidem Article Ibidem Article 3, paragraph X. 30 Ibidem Article Ibidem Article 25. 8

9 3. Executive Order that amends and adds various provisions of the Regulations to the General Law on Ecological Balance and Environmental Protection in the Area of Environmental Impact Assessment. 4. Executive Order that amends, adds and derogates various provisions of the Regulations of the General Law on Ecological Balance and Environmental Protection in the Area of Prevention and Control of Atmospheric Pollution. 5. Executive Order that amends and adds various provisions of the Regulations to the General Law for the Prevention and Comprehensive Management of Wastes. 6. Executive Order that amends and adds various provisions of the Regulations to the General Law on Ecological Balance and Environmental Protection in the Area of Ecological Zoning. 7. Executive Order that amends, adds and derogates various provisions of the Regulations to the General Law on Ecological Balance and Environmental Protection in the Area of Registry of Emissions and Transfer of Pollutants. 8. Regulations to the Law on Income on Hydrocarbons. 9. Guidelines that establish the criteria for the granting of Certificates of Clean Energies, and the requirements for its obtainment. 10. Executive Order that amends the provision that creates the Mexican Institute of Oil as a decentralized entity, published on August 26, Executive Order that amends, adds and derogates various provisions of the Interior Regulations to the Secretariat of the Environment and Natural Resources. 12. Executive Order that amends and adds various provisions of the Interior Regulations of the Secretariat of Finance and Public Credit. 13. Executive Order that amends, adds and derogates various provisions of the Regulations to the Federal Law on Budget and Fiscal Responsibility. 14. Regulations of the activities referred to in the Third Title of the Hydrocarbons Law. 15. Interior Regulations of the Secretariat of Energy. 16. Regulations of the Law on Geothermic Energy. 17. Regulations of the Hydrocarbons Law. 18. Regulations of the Law on Electric Power Industry. 19. Regulations of the Law of Petróleos Mexicanos. For more information, please contact: Héctor Herrera hector.herrera@haynesboone.com 9