A New Geothermal Framework For Mexico

A New Geothermal Framework For Mexico

April 24, 2015

Mexico has a new law to regulate geothermal exploration, drilling of geothermal wells and the use of geothermal steam or fluid to generate power.

Regulations issued in late 2014 to implement the new law address the legal, technical, administrative and financial requirements, as well as the procedures necessary, to obtain a registration, permit or concession.

Three Activities

Mexico treats geothermal activities as falling into three broad categories, each of which is regulated. The three are reconnaissance, exploration and production. Use of subsurface land for geothermal projects has priority over any other use of the land, including mining, but not over activities pertaining to the hydrocarbons industry.

“Reconnaissance” refers to scouting sites and deposits and conducting surveys for possible drilling.

Mexican law allows private individuals and companies incorporated under Mexican law and the Comisión Federal de Electricidad or CFE and other state productive enterprises to engage in reconnaissance, but they must register first with the Ministry of Energy. The registration involves submitting evidence of an applicant’s legal, technical and financial capacity. Once registered, an applicant has eight months to do the reconnaissance before the need to update the registration.

“Exploration” is test drilling and any other work above or below ground to confirm the existence of a geothermal resource and identify the boundaries of a geothermal area.

Exploration requires a permit from the Ministry of Energy.

A company should apply for a permit two months before the registration for reconnaissance activities expires. The permit requires the same showing of legal, technical and financial capacity as well as the technical feasibility of the project. An applicant must also submit a technical exploration plan with scheduled milestones and a financial plan with details of the proposed investment at each stage of the project.

Permits do not grant real estate rights to their holders; rather, they only grant a temporary right to explore the geothermal resource.

Permits may be issued for areas of up to 150 square kilometers and may be valid for three years. They can be renewed for another three years after the initial term. Studies of the explored reservoir and other information provided to the Ministry of Energy by the permit holder are confidential for as long as the permit remains in effect.

“Production” refers to any activities after the production wells start producing and the steam or fluid is used to generate electricity or is sold in the market for other uses.

Production requires a production concession from the Ministry of Energy. Such concessions are only given to holders of exploration permits. The concession cannot exceed the area covered by the exploration permit. A geothermal concession grants an exclusive right to use the geothermal reservoir in the concession area, but does not grant any real property rights in favor of the concession holder.

Production concessions are valid for 30 years and may be extended at the request of the concession holder with the approval of the Ministry of Energy.

The Ministry of Energy may reclaim a concession where there are risks to the population or the environment or for national security reasons.

The holder of a concession can assign its rights and obligations under the concession to a third party, but this requires prior authorization of the Ministry of Energy. Only a notice to the Ministry is required for an assignment to an affiliate

To obtain a production concession, the applicant must also have a power generation permit from the Comisión Reguladora de Energía, get confirmation of interconnection feasibility from the independent system operator — CENACE — comply with environmental requirements and pay any applicable fees.

Other Issues

The Ministry of Energy must put out for public bid any concession that terminates, lapses or is revoked due to failure of the concession holder to comply with conditions.

Holders of exploration permits and production concessions must provide financial guarantees. Permit holders must deliver and maintain for the term of the permit a performance guarantee for 1% of the financial plan proposed in the exploration schedule. Concession holders must deliver and maintain, until commercial operation has been achieved, a performance guarantee for 0.5% of the aggregate required investment. All guarantees and bonds must be issued by Mexican financial institutions and be payable to the order of the Mexican federal treasury.

The new geothermal law regulates not only the exploration of hydrothermal geothermal reservoirs, but also the use of geothermal water. A permit holder for a hydrothermal geothermal reservoir must drill one to five exploration wells, with the number to be determined by the Ministry of Energy based on the size of the permitted area and the corresponding technical studies. Any geothermal water extracted during exploration must be re-injected into the ground to maintain the renewable nature of the resource.

The regulations distinguish between production concessions for geothermal reservoirs and concessions for the production and use of the subsurface waters in such reservoirs. Given that each concession serves a different purpose, different rules, terms, conditions and processes apply to each. Concessions for geothermal waters are regulated by the National Waters Law, rather than the new geothermal law, and must be obtained from the Comisión Nacional del Agua.

The new law grants CFE the right to select certain areas for its exclusive exploration and production of geothermal resources upon request to the Ministry of Energy, so long as it provides evidence that it can develop the areas efficiently and competitively. CFE had until January 30, 2015 to provide the Ministry of Energy with a list of such areas for development. However, it may still choose to develop them jointly with the private sector. The Ministry of Energy has until May 30, 2015 to respond to CFE’s requests.

The new law allows CFE to develop new projects jointly with the private sector or to bid them out for exclusive development by the private sector.

Any party who was already engaged in geothermal exploration or production at a site in Mexico before the new law was enacted, and who did not need a concession, registration or permit under the National Waters Law, may continue with its project, provided it notified the Ministry of Energy of its activities within 30 business days after the new law was enacted.

Anyone holding a concession granted under the National Water Commission when the new law was enacted will be grandfathered from the need to get a permit or concession under the new law.

David Jiménez and Javier Félix in Mexico City, and Raquel Bierzwinsky in New York