THE MEXICAN OIL & GAS REFORMS: ARBITRATION AND DISPUTE RESOLUTION IN THE 2014 MEXICAN HYDROCARBONS ACT

• Jurisdiction: Derecho Internacional

International Mining and Oil & Gas Law, Development, and Investment
(Apr 2015)
CHAPTER 13C
THE MEXICAN OIL & GAS REFORMS: ARBITRATION AND DISPUTE RESOLUTION IN THE 2014 MEXICAN HYDROCARBONS ACT
Alejandro Escobar ¹
Partner
Baker Botts
London

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ALEJANDRO A. ESCOBAR is a partner at Baker Botts' London office, where he practices international arbitration and public international law. Mr. Escobar has extensive experience acting for businesses and governments in disputes arising under treaties for the promotion and protection of investments, and on other areas of public and private international law, including international arbitration proceedings concerning complex and high value projects. He regularly advises on matters involving multiple jurisdictions and overlapping obligations under treaties, general international law, domestic law, and contracts. His disputes work has involved proceedings conducted under the major arbitration rules, including those of ICSID (where he was Senior Counsel), ICC, UNCITRAL, LCIA, and SCC. Mr. Escobar also serves as arbitrator in international commercial and investor-State disputes. He practises bilingually in English and Spanish and is dual qualified in Chile and in England & Wales. For ten years, Mr. Escobar taught the International Law of Foreign Investment at University College London, and now regularly speaks on the subject in the United Kingdom and abroad. Mr. Escobar is a graduate of the University of Chile and of the University of Cambridge.

Arbitration and Dispute Resolution in the 2014 Mexican Hydrocarbons Act and the Production-Sharing Contracts of the First Invitation to Bid for Exploration and Extraction in Shallow Waters

The guidelines for the first bidding process for production sharing contracts for the extraction and exploration of hydrocarbons in Mexican shallow waters (CNH-R01-L01/2014) include a model contract to which the winning bidder is expected to consent. The model contract, drafted on the conditions laid down by the new Hydrocarbons Act, establishes international arbitration as the general mechanism to adjudicate disputes arising from the production-sharing agreement. However, the federal courts of Mexico are to retain exclusive competence over claims against or arising from unilateral administrative rescissions by the Mexican authorities. This government prerogative and the jurisdictional exclusion are consistent with Mexican administrative law doctrine, but may leave open certain legal issues regarding he handling of eventual disputes. This paper spells out the overall framework of international arbitration provided by the model contract and outlines the most evident remaining issues for dispute resolution.

Introduction

I. International arbitration in the Hydrocarbons Act and the model contract

II. Administrative rescissions as an "EXCEPTION" to arbitration

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A. The federal courts of Mexico retain exclusive competence to hear claims against or arising from administrative rescissions

B. Reserving the review of unilateral administrative rescissions to the national courts reflects the traditional approach to State contracts

III. The possible consequences of the jurisdictional "exception"

A. The Model Contract expressly carves out disputes relating to administrative rescission from the disputes submitted to international arbitration

B. The allocation of competence ratione materiae to two fora might nevertheless result in parallel proceedings

Conclusion

Introduction

Officially published on August 11, 2014, the new Hydrocarbons Act is one of the several pieces of legislation that have come to implement a historic constitutional reform in the Mexican energy sector.

Eight months earlier, on December 20, 2013, President Enrique Peña Nieto signed into law the amendments to a number of constitutional provisions regarding national energy resources. Aimed at reversing a decline in oil and gas production, the reforms opened Mexico's oil, natural gas, and power sectors to private investment for the first time in many decades.¹ As a result, state-owned

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companies such as Petroleos Mexicanos (Pemex) can now partner with international private companies that have the experience and capital required for sustained exploration and production activities in Mexico.

As part of this reform, the new Hydrocarbons Act, together with a set of related laws,² offers different types of contracts for private companies interested in investing in Mexico, including production-sharing and licensing modalities. Once the exploration and production areas were determined by round zero in August 2014, the first round of public bidding for exploration and production in Mexican shallow waters opened on December 11, 2014 and closed on March 23, 2015.³ The Hydrocarbons Act sets, the guidelines, conditions, and legal basis for the entire process.

I. International arbitration in the Hydrocarbons Act and the model contract

The Hydrocarbons Act (Hyd. Act) covers in its Articles 11 to 31 the basic regime of the future production sharing contracts now open to bidding.

Arbitration is specifically allowed by Art. 21 Hyd. Act. This provision determines that, in dealing with disputes arising from exploration and production contracts, arbitration agreements and other alternative dispute resolution mechanisms may be agreed upon as provided by Title IV, Book V, of the Commercial Code and the international treaties on arbitration and dispute

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resolution to which Mexico is a party. The reference to the Commerce Code directs to the part of the code that, since 1993, implements into Mexican law the UNCITRAL Model Law on International Commercial Arbitration.⁴

Based on Art. 21 Hyd. Act, the model contract⁵ between the Comisión Nacional de Hidrocarburos (CNH) and the winning bidders, as published in the bidding guidelines for the first invitation to bid, has established international arbitration as the principal mechanism to adjudicate disputes arising from or connected with the performance of the production-sharing contract. Pursuant to Art. 26.4 Mod. Cont., "any dispute arising from or relating to the Contract . . . shall be resolved by arbitration."

However, the second paragraph of article 21 Hyd. Act introduces a number of limitations to any arbitration agreement to be consented by the CNH. Among these conditions are that "the CNH and the contractors shall not submit themselves in any case to foreign laws." In addition, the arbitral proceeding will comply with a number of requirements, namely, that (a) the applicable law shall be the Mexican federal law; (b) the proceeding shall be conducted in Spanish; and, (c) the award shall be based on the applicable law and binding and final for both parties. Echoing Art. 21 Hyd. Act, Art. 26.4 Mod. Cont. has made clear that the arbitration proceeding will be

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conducted in Spanish, and the applicable substantive law will be as provided in Article 26.1 Mod. Cont., which, in turn, provides that the entire contract will be governed by and construed in accordance with "the laws of Mexico."

Other basic aspects of the arbitration are also provided by the model contract's arbitration agreement, according to the requirements of the Hydrocarbons Act

First, as to the rules applicable to the arbitration, Art. 26.4 Mod. Cont. determines that it will be conducted pursuant to the UNCITRAL rules.

Second, before the parties may submit the matter to arbitration, the contract imposes on the parties a mandatory consultation period. Under Art. 26.2 Mod. Cont, the parties must "endeavor to resolve it through a mechanism of direct consultation." A communication sent by one party to the other will suffice to start this consultation period. Only when the dispute has not been resolved within three months after the commencement of the consultation period, may either party submit it to arbitration.⁶

The same provision determines who will appoint the arbitrators and how. Pursuant to Art. 26.4 Mod. Cont, the President of the International Court of Justice will be the appointing authority for the proceeding. The arbitral tribunal will consist of three members, one named by the CNH, another by the contractor, and the third--who will be the President of the tribunal--named in accordance with the UNCITRAL rules, provided that:

(i) the claimant will name its arbitrator in the notice of arbitration and the respondent will name its

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arbitrator within 90 days from the date that it personally receives the notice of arbitration; and

(ii) the two arbitrators named by the parties will have a period of no less than 60 days from the date the arbitrator designated by the respondent accepts her or his designation as arbitrator, to select, in consultation with the parties, the third arbitrator, who shall serve as the President of the Tribunal.

The arbitration clause of the model contract makes further provision for the applicable substantive law, the language of the proceeding--in the terms explained earlier-- and the seat or legal place of the arbitration, which will be the City of The Hague in the Kingdom of the Netherlands.

In addition, the fact that a dispute has arisen and there is a judicial or arbitral proceeding ongoing does not allow the contractor to suspend the petroleum activities, unless the CNH terminates the contract or gives its consent.⁷

Finally, pursuant to Art. 26.7 Mod. Cont. all contractors expressly waive the right to make any claims through diplomatic channels, for themselves and on behalf of all their affiliates.⁸

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II. Administrative rescissions as an "exception" to arbitration

A. The federal courts of Mexico retain exclusive competence to hear claims against or arising from administrative rescissions

While international arbitration stands as the general means of dispute resolution both in the Hydrocarbons Act and in the model contract, there...