A recent ruling by Mexico’s Supreme Court to uphold the constitutionality of the 2021 Hydrocarbons Law could further limit the ability of private companies to obtain regulatory permits and heighten risks of government intervention in midstream and downstream operations, industry experts told NGI’s Mexico GPI.
Last month, the majority of Mexico’s 11 Supreme Court Justices ruled that the Hydrocarbons Law proposed by President Andrés Manuel López Obrador in 2021 is constitutional.
The decision could “introduce impactful changes to the regulation of hydrocarbon-related midstream and downstream activities, including the suspension of permits and the strengthening of facility occupation measures, allowing for operation by state-owned companies,” Diana Pineda, partner at Sainz Abogados in Mexico City, told NGI’s Mexico GPI.
The recently approved measures allow Mexico’s state-run energy companies, Comisión Federal de Electricidad (CFE) and Petróleos Mexicanos (Pemex) to temporarily occupy or intervene in the facilities of private midstream and downstream companies if deemed necessary. Meanwhile, the Energy Ministry (Sener) and industry regulator Comisión Reguladora de Energía (CRE) could suspend or revoke permits if they are considered to be “a risk for national, energy or economic security,” Pineda said.
“An enhanced authority of government intervention in the permitting process – to grant, suspend, occupy, or revoke permits – in midstream and downstream activities could discourage the interest of prospective new participants or dissuade current permit holders from expanding their activities,” she said. “Those who have adapted to operate within the new framework – introduced piece-by-piece over the last six years – may stand to gain from reduced competition in the industry.”
The original initiative to modify the Hydrocarbons Law was presented by López Obrador in May 2021 and was approved by Congress. However, an injunction by minority legislators that claimed the bill was unconstitutional halted its implementation.
Nearly three years later, the Supreme Court ruling that the changes to the Hydrocarbons Law were constitutional surprised many in the industry, particularly given that some of López Obrador’s main initiatives to strengthen the role of Pemex and the CFE – such as the Electricity Industry Law reform proposal – had been previously deemed unconstitutional.
Permits, Storage Requirements
Throughout the López Obrador administration, the awarding of permits to private participants to generate and distribute energy in Mexico has been dramatically reduced, leading U.S. companies to file complaints with the Office of the U.S. Trade Representative.
In 2022, the United States requested consultations under the U.S.-Mexico-Canada-Agreement (USMCA), and claimed that “Mexico has taken, or is taking, actions or inactions, which are curtailing the ability of private companies to participate effectively, if at all, in Mexico’s energy sector.” The consultation process has remained unresolved.
The recent approval of the Hydrocarbons Law would impose even stricter measures for companies seeking to obtain permits, as well as add new regulation that requires they meet minimum storage capacity limits established by the Energy Ministry in 2016, according to experts.
New permit applicants must now comply with these minimum storage capacity requirements, and failure to do so may result in their denial or revocation, Pineda said.
“This new cause for revocation is introduced at a time where Mexico continues to have limited storage infrastructure and a delay in permitting since the governmental agencies closed for nearly three years due to the Covid-19 pandemic,” she said. “Previously, safety storage capacity was not a pre-existing requirement for permit applications – since it is calculated according to actual sales days – and permit applicants cannot have sales until the permit is secured, which created a chicken-and-egg dilemma. It was also not a cause for revocation of already granted permits.”
‘Indirect Expropriation’
On April 29, Mexican Supreme Court justice Alfredo Gutiérrez Ortiz Mena, who voted that the reform to the Hydrocarbons Law was unconstitutional, said that the changes to the legislation allow for an “indirect expropriation” of third-party companies operating in the industry should their permits be revoked.
Throughout the López Obrador administration, operations of private companies in the extractive, bottling and energy industry – such as the hydrogen plant operated by French firm Air Liquide SA at a Pemex’s Tula refinery – have been occupied by Mexican government authorities.
The approved legislation, which allows for a “temporary occupation” and “intervention of facilities” in midstream and downstream activities to safeguard national interests, provides “no clear parameters on when such interests need to be protected,” Pineda said.
“The CRE or Energy Ministry may contract state-owned companies to manage such facilities…and intervene when circumstances necessitate protection of the nation’s interest,” Pineda said.
The law’s changes enter into effect immediately, and have generated more uncertainty for private companies operating in the Mexican midstream and downstream market.
“It remains to be seen how governmental agencies will implement their new authorities under the reformed law, including decisions regarding permit suspension, revocation, and the impact on infrastructure transactions,” Pineda said.
