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March 30, 2021

Latam

MEXICO: New setback for energy sector

BY Nicholas Watson

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A reform of the Hydrocarbons Law unveiled late last week marks the latest step in President Andres Manuel Lopez Obrador (AMLO)’s rollback of the 2013-14 energy reform. The bill presented to the lower house on 27 March would grant the government discretionary powers to suspend permits granted to private companies for various mid- and downstream activities including fuel and crude transport, distribution, storage, and sales. State-run entities could even step in to run privately-operated facilities under suspension orders. The bill highlights how the energy sector is now grappling with a mix of regulatory uncertainty, discriminatory action against private companies, policy radicalization, and litigation.

While the bill is likely to pass easily in Congress, it will face local legal challenges that would likely delay or block its implementation on grounds that it violates competition laws and/or could amount to indirect expropriation. The reform proposal will also threaten enforcement action from US companies that are already worried about violations of the principle of non-discriminatory treatment under the United States-Mexico-Canada trade agreement (USMCA). Last week – before the Hydrocarbons Law proposals were submitted – a group of US businesses grouped under the umbrella of the Alliance for Trade Enforcement (AFTE) wrote to US Trade Representative Katherine Tai urging her to “fully enforce USMCA” provisions amid continuing regulatory action designed to benefit state oil company Pemex and the state-run CFE electricity utility to the detriment of private companies.

AMLO has long opposed energy liberalization, and on the back of his proposal to alter grid dispatch rules to benefit the CFE (currently suspended following multiple injunctions), the latest proposal is hardly a surprise. Pemex has in recent years lost market share in the mid- and downstream sectors, and AMLO almost certainly understands that restoring Pemex to predominance requires action from the wellhead all the way to the filling pump. Even if his plans are stalled by injunctions, the overall effect could be the same since investor confidence will surely shrink back amid the prevailing political and legal uncertainty.

There is also an important political dimension to the timing and thrust of the reform. As well as viewing the energy opening as a plot to hollow Pemex out, AMLO also sees the entire reform process as inherently corrupt. With the eradication of corruption as his rallying cry, AMLO wants to frame his strategy to make Pemex great again as coterminous with his anti-corruption struggle. By extension, legal challenges against AMLO’s reforms are the retrograde steps of a corrupt ancien regime intent on checking his Fourth Transformation. The immediate-term objective is to maintain or grow the National Regeneration Movement (Morena)’s lower house majority in the June mid-term elections; while AMLO remains popular, he may be betting that it could be easier to pass this type of reform now and then hope that the path to implementation opens in the Supreme Court (SCJN) later in the year.

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