Competition watchdog speaks out against Mexico O&G bill

An opinion submitted to congress by Mexico’s competition watchdog Cofece opposes large parts of legislation to reform the oil and gas sector. 

Cofece said the law would hurt competition and value chains, reduce the selection of goods and services, and drive up prices.

The proposed legislation would change the rules governing hydrocarbons permits in Mexico and give the government powers to intervene in the sector during an emergency. 

Approving the current version “would negatively affect the competitive process and free competition across the value chain of hydrocarbons, petroleum products and petrochemicals, which could result in a decrease in the supply of goods and services in the industry, with the consequent increase in the prices that Mexican families and companies pay,” according to the opinion from April 8, which was made public Monday.

The energy bill has drawn criticism from sector participants and observers and is seen by some as a step toward expropriation. Others claim the reform is relatively timid compared with previous ones. 

Cofece’s recommendation comes after a year of lawsuits and other efforts to push back on government initiatives to advantage state-owned utility CFE over private power projects. 

Those measures, including recently passed electricity sector reforms, are tied up in the courts, and this latest legislative proposal could spark legal action as well. 

The Cofece opinion detailed how the constitution establishes a competition regime in the value chain of hydrocarbons, petroleum products and petrochemicals, related to production, import, transport, storage, distribution and sale to the public.

Hence, NOC Pemex and other state-owned companies but also individuals must obtain permits that “must be granted expeditiously and without undue discrimination” as long as they comply with security, operational capacity, and infrastructure considerations, among others. 

In no case should the permitting entity restrict access to interested parties who meet the requirements, the entity said.

The government’s planned reform “would discourage entry and reduce offerings by distorting the permitting regime, because it empowers and gives broad discretion to the energy ministry and [sector regulator CRE] to temporarily suspend permits” in cases considered an “imminent threat to energy security or the national economy.”

These two qualifiers, added Cofece, are ill-defined in the legislation and/or lacking in clear criteria for what constitutes such a threat.

It would also generate uncertainty by changing the default status for projects being submitted for permit approvals from positive to negative, which would discourage speedy approvals, and create default denials without requiring the body to justify these.

The legislation would also limit the number of competitors in the market by establishing prior verification of certain storage capacity as a requisite for the granting of permits by the energy ministry, said Cofece.

The watchdog said that although sufficient storage capacity is necessary for competition in the fuel production chain, requiring its verification prior to the granting of the permit generates a “vicious circle,” with the lack of capacity due to the non-existence of permits, which in turn are lacking due to infrastructure which lacks private investment due to market uncertainty. 

In addition, the bill includes a provision to revoke permits that fail to comply with this requirement, which would constitute a violation of rights and an unjustified restriction on supply. 

But Cofece affirmed the government’s interest in combating hydrocarbons trafficking and does not oppose the modification that would allow revocation of permits related to specific causes like trafficking stolen fuel.