Mexico's Hydrocarbon Reforms: State Retakes Control
Published 10 May 2021
by David Stent, Content Manager, Energy Council
A set of divisive reforms to the Mexican hydrocarbon sector have been confirmed by the state’s congress, in a move that is set to consolidate the power under government authorities and state-owned oil company, PEMEX. By reversing the liberalisation reforms of 2013, the new policies will notably allow for a suspension of operating permits if a company has been deemed a “threat to national security, energy security or national economy is foreseen” – the wording of which injecting concern and uncertainty to private investors.
The Hydrocarbon Reform Bill (Ley de Hidrocarburos or LH) will be overseen by Mexico’s Secretariat of Energy (SENER) and the Energy Regulatory Commission (CRE), granting them wide-reaching powers to suspend or revoke any permit that does not conform to the new laws. As the 14th largest oil and gas producer on the planet, Mexico controls a strong market position, particularly given the state’s beneficial geographic position straddling North and South America.
Following President Lopez Obrador’s ascendency to power, the state’s position has shifted to seek more control of resources and move profits from private hands to the public purse. Striking the balance between public and private ownership of resources, especially fossil fuels, has consequences to the economy on either side. On one hand, foreign investors (particularly those based north of the border in the USA) may seek to sell-up or withhold new investments until there is greater clarity of consequences. On the other hand, the Mexican government has a responsibility to maximize the profits from their resources to attain the most affordable energy for their citizenry.
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The New Rules Of Operation
Affecting all private companies operating in the oil and gas sector, the bill will enhance the state’s capacity to control private company’s operations, including the power to have their permits revoked if there is non-compliance for the quality, quantity or measurement of hydrocarbons or meet the minimum storage requirements set out in the framework.
All companies across the sector value chain (Upstream, Midstream & Downstream) must comply to these new regulations or face a revocation of their permits, even if granted prior to the legislation coming being enforced. As law firm DLA Piper notes, private investors now face a challenging gauntlet to conform to the new rules, further complicated by the Negativa Ficta clause that infers that any silence from authorities on the transfer of permits, can be conferred as a denial if the authoritative silence exceeds a certain date.
The Ministry also set out potential revocation for the smuggling of petroleum products, hydrocarbons and petrochemicals. While this may not appear a major hurdle, the strict new frameworks that govern the import and export of oil and gas may provide authorities with opportunities to abuse the clause.
One of the most controversial laws states that the authorities can “suspend any permit granted, if their operations are deemed a threat to national security, energy security or the national economy”. A suspension’s length will be determined by SENER and CRE, erstwhile granting the power to take administration of operations, maintaining the current operating staff, seeking new operators or a combination of each. With a wide scope for de facto expropriation of assets into government control, private investors and financiers have sought assurances over the security of their ownership. A suspension thereafter can only be lifted once the company has sufficiently demonstrated a restoration of their non-compliance.
One of these assurances for investors exists as an indemnity clause allowing for recompense to parties who suffer financial losses as a result of government action. Law firm Morgan Lewis, also notes that there is space within international law for affected parties to seek international arbitration via the investor protections within NAFTA and CPTPP trade agreements (although these cannot be pursued if first challenged in domestic courts).
Where To From Here…
The reforms have signaled concern for many foreign investors, however the reality for oil and gas producers and investors is that they are well accustomed to navigating regulatory barriers as a matter of course. The reforms, while challenging and creating previously unseen costs, will allow for government to take a greater control of a sector that has experienced intense volatility over the past 6 years. The oil price shocks of 2019 and 2020 caused the country to experience negative growth for the first time in a decade, and set about a reconsideration if the laws governing oil and gas were fit for purpose.
Investors in the North and South American oil and gas sector will likely be experienced players, with a deeper understanding of the cyclical nature of the sector and how to overcome regulatory barriers. While there is concern of government overreach, these worries will only truly come into play once the authorities begin to act on the new legislation.