What’s next for Mexico’s hydrocarbons reform?

Despite a rapid series of suspensions of Mexico’s hydrocarbons reform following its publication in the official gazette, the future of the law is still uncertain.

Experts consulted by BNamericas said the outlook for the new legislation was less clear than a previous and highly controversial reform of the electric power sector, given the changes are less clearly unconstitutional and their consequences may be contingent on further actions by the federal government, such as the suspension of permits that are yet to take place.

Read: What is actually in Mexico’s hydrocarbons bill? 

The provisional suspensions of the reform, which represent a win for private investors that filed “amparo” appeals against the changes, are a provisional measure meant to preserve the state of the market until a final decision is made by the courts. They are applied generally, meaning they encompass the entire industry and not only those parties that issued these appeals.

These provisional suspensions are likely to turn into definitive suspensions in the coming days. But a long legal process is expected to play out before the courts issue definitive rulings regarding the controversial legislation that would expand government powers to review and cancel midstream and downstream permits.

Benjamín Torres-Barrón, a legal expert in Mexico’s energy sector at law firm Baker McKenzie, told BNamericas that the suspension could help bolster investor confidence in the country’s respect for the rule of law.

“These [suspensions] are good news for the industry, no doubt,” Torres-Barrón said. “The positive effect is that I think it gives more certainty to the market on the independence of the courts and that the courts are there to ensure the law’s respect for the country’s constitutional principles."

Susana Cazorla, a partner at energy consultancy SICEnrgy, was also positive about the decision and said the changes to the law, if not halted, could jeopardize fuel sale and import permits.

“There's a very important objective there. The administration is interested in ending as soon as possible the sale and import permits held by those that don't coordinate with [NOC] Pemex. Considering what has been suggested [by the administration’s actions], that is the direction permit suspensions are likely to take,” she said.

However, Torres-Barrón pointed out that the future of ongoing amparo appeals interposed by private players was not as clear as those of the appeals against changes to the general electricity law (LIE).

“The future is more uncertain than in the case of the electric industry law. Put simply, the analysis is more complex because the arguments of the electric power reforms, in a clear and self-evident fashion, were illegal. In this case, the issue requires a more complex and profound analysis,” Torres-Barrón said.

The legal expert pointed out that, while granting the suspension, federal judges at the same time pointed to this complexity by arguing that it was not clear that the new rules would affect all permit holders equally.

“This judge does not perceive elements that would indicate that the appealing party is encompassed by the suppositions of these norms, because at least prima facie, it does not seem these rules apply to every permit holder for the regulated activities in the hydrocarbons sector," wrote judge Rodrigo de la Peza in one of the suspensions.

Rather, the judge said, the new changes were likely to affect “only those that, because of subsequent acts by the administrative authorities, would suffer the effects of the norm in terms of its judicial implications, so, at least apparently, it would be an effect that is conditioned to an act that is different and would occur later than the norm that is being appealed.”

Torres-Barrón added that new changes, via a separate reform, to the hydrocarbons law ending the special regulation that limited Pemex’s ability to wield its broad market power to the disadvantage of competitors, could provide more solid ground to file amparos against the hydrocarbons law as a whole.

“When the reform to asymmetric regulation is published [in the coming days], it will improve the position of those who file for appeals. You can issue an amparo against both reforms, as they both change the hydrocarbons law,” Torres-Barrón said.

Earlier this week, two federal competition courts issued several temporary suspensions of the hydrocarbons reform. Together with the changes to the electricity law, the reforms were fast-tracked through congress in a bid by Mexico’s government to bolster public utility CFE and NOC Pemex through sweeping changes to energy sector regulation.

The ultimate fate of the changes is likely to be decided by Mexico’s supreme court. The government has said it will pursue constitutional changes if the reforms are struck down. 

To do this, ruling Morena party would need to obtain two-thirds majorities in both chambers in the upcoming June midterm elections, in which parts of the senate and the entirety of the lower chamber are up for grabs.