Does the Hydrocarbon Law offer the equivalent of a U.S. mineral lease?

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In this report, we ask a difficult question: do Mexico’s hydrocarbon laws provide the equivalent of a U.S. minerals lease for oil and gas? To answer this question, we first examined the terms and concepts in Mexico’s Mineral Law, where the legal figure of concession exists. We then considered the nature of a U.S. mineral lease.

The central concept of a Mexican mining concession and a U.S. minerals lease is the figure of exclusivity of commercial rights to production for a specified period and under specified conditions.  One fundamental condition is that the lessee, as the operator, is responsible for all investments and operating costs; a second condition is that the lessee pays royalties, taxes and diverse fees (such as a signing bonus). A third requirement is that the lessee conduct himself as a responsible corporate citizen, with attention to the social and environmental costs and benefits of his industrial and commercial operations.

All of these considerations are found in the 2014 hydrocarbon legislation; yet we conclude that, together, they do not add up to an equivalence of a U.S. oil and gas lease.

We conclude that the government is offering its version of a risk-service contract, but with the provision that the contractor will be paid in kind or in cash (but not, as in Iraq or Iran, as a discounted price for oil). The contractor may report his financial expectations from the contract; it is unlikely, however, that such a statement of expectations will meet the test of an asset.

The legal consequences of this difference may be trivial or profound.

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Written by

Mexico Energy Intelligence

Baker & Associates offers niche-market business and policy intelligence related to Mexico's oil and gas, power and chemical industries. Over 1,000 reports have been issued in the last 20 years. Subject matter expert and publisher George Baker, who directs the firm, has carried out consulting assignments starting in the late 1970s at the height of the Oil Boom in Mexico. He brings bilingual and bicultural skill-sets to understanding and responding to challenges of business and public policy, coupled with a deep familiarity with the history and idiosyncrasies of the Mexican operating environment.