THE ENERGY-WATER NEXUS: WATER REGULATION IN THE WAKE OF MEXICO'S HYDROCARBON REFORM.

• Author: Hyatt, Jacqueline F.

1. INTRODUCTION II. HYDROCARBON REGULATION IN MEXICO: NEW DEVELOPMENTS A. The PEMEX Era: 1938-2013 B. The Constitutional Amendment Age: December 20, 2013 to Present C. Water Permitting D. The New Agency: National Agency for Industrial Safety and Environmental Protection (ASEA) III. GROUNDWATER SOURCING A. Shale Development by the Numbers B. Water Availability in Mexico C. What Is at Stake? D. The Changing Landscape of Water Regulation E. Managing Water Scarcity with Government Management Plans IV. POTENTIAL SOLUTIONS A. Purchase Permits from Existing Users B. Discover and Tap New Aquifers C. Recycle and Treat Wastewater D. Use Water from the Gulf of Mexico. V. CONCLUSION I. INTRODUCTION

   Water catalyzed political change throughout Mexican history: from ancient water management in Tenochtitlan (the area known today as Mexico City), to the 1910 revolutionaries demanding access to sanitary water in the capital city, to the early years of oil exploration in the desert, water has been a guiding force for Mexican policy makers. (1) Mexico has produced oil since the time of the Aztecs and Maya, who used petroleum to color fabrics and make glue. (2) Given that water is a key input for petroleum drilling, water has been an important concern for Mexico in developing its petroleum reserves.

   In 1868, commercial oil production began in the state of Veracruz. (3) Beginning in 1938, when President Lazaro Cardenas del Rio expropriated foreign oil companies, Petroleos Mexicanos (PEMEX) conducted all petroleum exploration, exploitation, refining, and marketing in Mexico. (4) Decades of dysfunction, corruption, and decreasing production and profits, combined with soaring high oil prices on the global market, however, created the ripe conditions for a politically and economically expedient Constitutional amendment. (5) On December 20, 2013, Mexico amended Articles 25, 27, and 28 of its Constitution to establish new industry structures for oil, gas, and electricity. (6)

   The reforms created by the Constitutional amendments, which overhauled the hydrocarbon, electricity, and financial industries, are broad and far-reaching. (7) The changes relevant to the reforms include the following. First and foremost, the reforms maintain state ownership of subsoil hydrocarbon resources. (8) For the first time in 75 years, however, private companies are allowed to take ownership of the resources once they are produced. (9) Second, the reforms transformed PEMEX into a productive state enterprise with the legal, contractual, and fiscal autonomy necessary to contract with private companies for shale oil and gas exploration. (10) Third, the four federal regulatory entities that oversee the hydrocarbons industry--the Ministries of Energy and Finance, the National Hydrocarbons Commission (CNH), and the Energy Regulatory Commission--were strengthened. (11) Additionally, the government created a new entity, the National Agency for Industrial Safety and Environmental Protection (ASEA). (12) Following the constitutional amendments, which outlined the general structure of the reform, secondary laws were enacted to fill in the gaps. (13)

   While there is an abundance of material analyzing the strength and promise offered by Mexico's hydrocarbon reform, there is a relative dearth for the same information regarding water resources. According to water policy expert Regina Buono,

   Energy has long enjoyed a high degree of awareness by the public; prices are watched carefully--made easily available via newspapers, television, and prominent websites--and advances have been made in energy efficiency. In contrast, water has not benefited from the same kind of attention and lacks any real incentives--commercial or political--for conservation and efficient use. (14) This Comment seeks to provide an overview of the existing laws governing water consumption in the oil and gas industry and to prescribe recommendations for amending the aquatic regulatory framework in light of the recent oil and gas reforms. Specifically, how will the government regulate water sourcing for oil and gas activities? How will unconventional onshore drilling affect Mexican groundwater resources? (15) In Section I, I will explore the history of hydrocarbon production in Mexico and the new energy-water nexus framework created by the reformed hydrocarbon laws. (16) In Section II, I will take a closer look at the regulatory framework governing groundwater sourcing for hydraulic fracturing fluids. (17) In Section III, I will investigate the potential solutions for water sourcing to meet the increased demand for water used to hydraulically fracture shale formations.

2. HYDROCARBON REGULATION IN MEXICO: NEW DEVELOPMENTS

   1. The PEMEX Era: 1938-2013

      From 1938 until December 20, 2013, Mexico regulated petroleum production according to Article 27 of the Mexican Constitution. (18) In 1958, Mexico created a PEMEX monopoly by promulgating the "Petroleum Law." (19) This law defined the regulatory framework of petroleum fields under Article 27 of the Constitution. (20) During this time, PEMEX functioned as Mexico's national oil company. (21) PEMEX, along with its subsidiaries, were regarded as "decentralized public entities of the federal Mexican government entrusted by the Nation to carry out the oil and gas industry." (22)

   2. The Constitutional Amendment Age: December 20, 2013 to Present.

      On December 20, 2013 Mexico amended Articles 25, 27, and 28 of its Constitution, creating a paradigm shift in Mexico's oil and gas industry. (23) In addition to the broad reforms made to the oil and gas industry, these Constitutional amendments delegated authority to several government agencies to promulgate secondary laws to fill in the regulatory gaps affected by the amendments. (24) Under Article 25, "the public sector shall be in charge, in an exclusive manner, of the strategic areas." (25) Under Article 28, strategic areas include activities of exploration and production of oil and other hydrocarbons, which "are considered of public interest and public order, and thus will have preference over any other activity implying the use of the surface and subsoil." (26) The state

      shall encourage and protect economic activities carried out by private parties and shall provide the conditions required so that the private sector's development contributes to national economic development, promoting competitiveness and implementing a national policy for industrial sustainable development that includes sectorial and regional aspects, according to the terms set forth by this Constitution. (27) It is hard to overstate the significance of these amendments to the Mexican Constitution because of the opportunities for shale oil and gas production. (28) These amendments to Articles 25, 27, and 28 were a watershed moment in history for oil and gas development in Mexico; not only were these changes revolutionary for the petroleum industry, but they also run deep into the heart of what Mexico means to its people. PEMEX has long been linked to "Mexicanity" and feelings towards its national identity and sovereignty. (29) In contrast, PEMEX today is a state productive enterprise whose purpose is "to create economic value and increase Mexico's income." (30) The passage of the hydrocarbon reform marked a turning point, opening Mexico's oil industry to private and foreign investment for the first time in 75 years. (31) Until these reforms, PEMEX was the sole entity managing the petroleum extraction operations across Mexico. (32) Opening the Mexican upstream industry to private investment is a complex process that has been divided into separate rounds, or stages of development. (33) While PEMEX will continue to be a key player in the Mexican oil sector, foreign investment and international technical expertise will generate development of offshore deepwater areas and onshore unconventional development. (34)

      However, these energy reforms have been tumultuous for PEMEX. (35) In February 2016, the CEO of PEMEX, Emilio Lozoya, resigned after PEMEX reported 12 straight quarterly losses (36) and its worst quarterly result in its history, amounting to a $10.2 billion loss. (37) Upon announcing Lozoya's resignation and naming Jose Antonio Gonzalez Anaya as his successor, the President of Mexico, Enrique Pena Nieto, explained that Gonzalez, and PEMEX in general, have two main challenges moving forward: '"To accelerate the transformation of PEMEX to take maximum advantages of the opportunities offered' by the opening of the country's oil industry to investments, as well as to 'achieve financial and productive strengthening at a time of low oil prices.'" (38) There is another critical, but overlooked, challenge that those seeking to develop Mexican reserves will face: where and how shale producers will obtain water resources. (39)

   3. Water Permitting

      The Mexican Constitution states that the ownership of the waters within the boundaries of national territory is vested originally in the Nation. (40) Accordingly, only Mexicans by birth or naturalization and Mexican companies have the right to acquire ownership of water or obtain concession for exploitation. (41) The State, however, may grant the same right to foreigners under the stipulated terms of Article 27. (42)

      The National Water Commission, or CONAGUA, is in charge of preserving Mexico's national waters and granting permits for the use of surface and groundwater. (43) In order to obtain a surface water permit to use national waters, an applicant must submit an application, pay a fee, and obtain an Environmental Impact Statement issued by the Secretary of the Environment and Natural Resources (SEMARNAT). (44) Permit approval requires "that there is availability of groundwater in the aquifer where the permit is requested in accordance with the Official Mexican Norms NOM-011-CNA-2000." (45) Obtaining a groundwater permit requires a similar process. (46)

   4. The New Agency: National Agency for Industrial...