Mexico’s new hydrocarbons law: Should investors be alarmed?

Energy sector experts have differing views on the potential impact of a new reform that would change the rules governing hydrocarbons permits in Mexico and give the government powers to intervene in the sector during an emergency.

The bill, set to be debated by the energy committee of Mexico’s lower chamber on Wednesday, has drawn harsh criticism from energy sector participants and observers and is seen by some as the first step towards expropriation, while others claim the reform is relatively timid compared with previous initiatives in the sector.

The bill is expected to be passed by the senate before the end of the current legislative period on April 30.

According to Rodolfo Rueda, a partner at law firm Thompson & Knight, the law purposefully left out changes to upstream regulation overseen by hydrocarbons watchdog CNH, as the government was hoping to avoid a direct confrontation with international oil majors. It instead focuses on downstream and midstream permits managed by regulatory commission CRE and energy ministry Sener.

“The most concerning aspect of the initiative are the changes proposed to article 57 and the creation of a new article, 59 bis, which would allow both CRE and Sener to temporarily occupy installations, intervene in the operations of permit-holders and suspend existing permits to guarantee the national interest,” Rueda told BNamericas.

Rueda added that the CRE or Sener would be allowed to suspend any existing permit in the event of “imminent danger” to national security, “energy security” or “the national economy”, temporarily or permanently, and would be allowed to hand over operations to state-owned firms.

President Andrés Manuel López Obrador pushed back against some of the industry’s concerns on Monday and said the government had no plans to expropriate energy infrastructure and would respect existing permits in the hydrocarbons sector.

But the law comes after years of regulatory changes aimed at limiting the issue of new permits and changing the rules of existing initiatives. In late 2020, the government attempted to make significant changes to permits governing fuel import and export activities.

Benjamín Torres-Barrón, a legal expert in Mexico’s energy sector at law firm Baker McKenzie, told BNamericas the law is far from being as impactful for Mexico’s hydrocarbons sector as the controversial electric power reform passed earlier this month was for the power generation business.

Regarding to controversial inclusion of emergency powers in the case of a threat to national security, energy independence or the national economy, the legal expert said these three concepts are already contained in the original law, passed as part of the energy reforms of 2014.

Torres-Barrón said he was concerned about the permitting process overseen by CRE changing from afirmativa ficta to negativa ficta, or from permits being automatically considered approved after a set period of time to them being considered denied if no response is given.

While the previous regime allowed companies to challenge a lack of response by the CRE and, in some cases, have courts instruct the regulator to approve permits to which it had not issued a response, under the new law, permits could be denied without justification, making it more difficult for investors to challenge a regulator’s negative decision, the expert said.

“The key issue here is perception. This, in conjunction with the changes we have seen one after the other, adds another concern and an impression of instability starts to consolidate. But generally speaking, the majority of the contents of the amendment to the law are not as problematic as previous reforms,” Torres-Barrón told BNamericas.

The law also includes provisions that reduce storage requirements for downstream firms and increase penalties for fuel theft, initiatives that were considered positive by several experts.

AN ATTEMPT TO REGAIN PUBLIC CONTROL OF FUEL SALES?

Thompson & Knight’s Rueda believes the law is mainly an attempt to wrestle back public control of Mexico’s fuel sales sector, and the players most impacted will be those in the downstream and midstream segments. The downstream sector was liberalized starting in 2014, and there are now 3,568 gas stations under brands other than that of state-owned Pemex, Rueda said.

“What is being sought through the initiative is to return the fuel sales market to Pemex, with direct impacts on import, commercialization, distribution, storage and end-user sale activities,” Rueda said.

Meanwhile Gonzalo Monroy, managing director of consultancy firm GMEC, told BNamericas he saw fuel import permit-holders as being the most at risk from the effects of the law. He also said the recent flurry of legislative changes is probably related to the upcoming parliamentary elections on June 6.

President López Obrador has said his administration will seek a constitutional reform if his legislative initiatives are struck down by federal courts and not upheld by Mexico’s supreme court. 

All of the experts contacted by BNamericas agreed that there were good reasons for federal judges to grant suspensions to the hydrocarbons bill once passed, in similar fashion to what has taken place after the new electric power law was enacted.

But, according to Monroy, the president, despite his popularity, may be rushing to reform the energy sector because his administration is still far from having the supermajority in both chambers it would need to change the constitution. And the prospect of losing seats in the upcoming parliamentary elections 6 could signal his last chance of pushing through sweeping legislative changes.

“It’s clear that the president knows he doesn’t have the votes to seek a reform to the constitution,” Monroy said. “The electric power law was passed in the senate with 68 votes in favor and they require 85 to pass a constitutional change…. If they lost their lower chamber majority, these changes would have no chance of being approved.”

The fate of the new law, once approved and potentially suspended, is likely to rest on Mexico’s supreme court. While 8 votes in opposition of 11 judges would mean the law would not be implemented, Monroy said the more likely scenario is that the law would be upheld but, with the support of six judges, existing investors would be allowed to seek appeals that would suspend the application of the new rules.

“This would benefit companies that are already in Mexico,” Monroy said, “which are operating today, but [the law] would probably affect any future investment, as those would fall under the new rules.”  

On Tuesday, several trade groups and observers also emphasized the problematic aspects of the bill. The country's largest fuel sales trade group, Onexpo, said in a release that the proposal violated the Mexican constitution and that the ambiguous emergency powers it conferred to the state were concerning.

Meanwhile, public policy investigation center IMCO, a non-profit, said the law was contrary to Mexico’s international trade agreements, and said its approval would further deteriorate the investment climate in the energy sector. It also raised concerns about the possibility of expropriation.