Credit: Original article can be found here
Mexico President Andres Manuel Lopez Obrador approved for publication on May 4 changes to Mexico’s Hydrocarbon Law (the Hydrocarbons Reform), which is aimed to impair investors in the sector. Following publication in the Federal Official Gazette (Diario Oficial de la Federación), it entered into force on May 5, 2021.
The Hydrocarbons Reform aims to bring back the dominating market position of Petróleos Mexicanos (Pemex), Mexico’s state-owned oil and gas company, to the sole detriment of private competitors. Ever since Mexico’s state oil monopoly, including Pemex’s downstream monopoly, was abolished beginning in 2013, Pemex has lost significant market share to private companies operating in the fuel import, midstream, and downstream market. The Hydrocarbons Reform does not only affect such companies dealing with gasoline and diesel, but also those dealing with natural gas, crude oil, and petrochemicals.
The Hydrocarbons Reform is yet another aggressive move by President Lopez Obrador, favoring national energy companies to the detriment of private investors and market players. The Hydrocarbons Reform was introduced by the president himself on March 26, 2021, and was then quickly passed by the Chamber of Representatives and Senate within just one month.
The Mexican Senate already passed a controversial reform to the Power Industry Law in March, also initiated by President Lopez Obrador, that targeted renewable energy private investors.
This LawFlash summarizes how the Hydrocarbons Reform negatively affects private investors in the oil and gas sector in Mexico, and how such investors can effectively protect their rights and investments in international arbitration.
THE HYDROCARBONS REFORM AIMS TO IMPAIR THE MARKET POSITION OF PRIVATE COMPANIES TO THE BENEFIT OF STATE-OWNED ENTITIES SUCH AS PEMEX
The Hydrocarbons Reform will affect all private companies in the Mexican oil and gas sector, including companies operating fuel import routes, fuel storages, logistics, and transport networks as well as gasoline stations.
In summary, the Hydrocarbons Reform implements the following negative changes for such companies:
- Mexico enhances and will be able to exercise regulatory control over the distribution, storage, import, and export of fuels and oil.
- Mexico’s Secretariat of Energy (SENER) and the Energy Regulatory Commission (CRE) receive far-reaching discretionary powers to suspend permits of private companies for unspecified reasons of national security, energy security, the national economy or, where applicable, for violation of laws and permit terms. SENER and CRE can also revoke permits of companies that are not in compliance with minimum storage policy requirements that can be set by SENER.
- Pemex and other Mexican state entities will receive the right to take over the facilities of companies that lost their permit without any provision providing for compensation or limitation on time.
- The application for new permits of private companies can be denied arbitrarily as an application is denied by default if the authorities do not respond within 90 days.
It can be expected that stakeholders will file for Amparo procedures before Mexican federal district courts to obtain injunctions against the Hydrocarbons Reform’s entering into force. However, for foreign investors there is a choice to be made.
FOREIGN INVESTORS HAVE AN AVENUE TO INTERNATIONAL ARBITRATION TO PROTECT THEIR INVESTMENTS AGAINST THE HYDROCARBONS REFORM
Foreign investors essentially have two options to protect their investments against the Hydrocarbons Reform: to either pursue domestic remedies, such as injunctions, before Mexican courts; or seek recourse to international arbitral tribunals outside of Mexico. These remedies are mostly mutually exclusive as many investment treaties contain so-called “fork in the road” clauses that do not allow investors to bring acclaim in arbitration if they have already challenged the measures in a domestic court.
Access to international arbitration is available to all foreign investors from a home state that has concluded an investment treaty with Mexico. At present, Mexico is party to 29 Bilateral Investment Treaties (BITs) with 30 countries that allow for investor-state arbitration. The BITs afford substantive investment protection to investors (individuals or legal entities) from countries such as Spain, Italy, Denmark, United Kingdom, Korea, France, Germany, Netherlands, Switzerland, and China.
US investors can also bring arbitration claims under the United States-Mexico-Canada Agreement (USMCA) that entered into force on July 1, 2020, and replaced the North American Free Trade Agreement (NAFTA). For US investors that invested in Mexico before July 1, 2020 (so-called “legacy investment claims”), the USMCA establishes that such investors can still initiate an arbitration under the protection provisions of NAFTA until the final cutoff date of June 30, 2023.
Finally, Mexico is also party to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) that protects investors from Australia, Canada, Japan, New Zealand, Singapore, and Vietnam.
These investment treaties usually oblige Mexico to (1) treat foreign investors’ investments fairly and equitably, including in line with investors’ legitimate expectations; (2) treat foreign investors no less favorably than its own nationals and the nationals of other states; (3) compensate, at fair market value, for any direct or indirect expropriation of investment; and (4) comply with contractual obligations assumed with regard to investments.
A violation of such investment protection obligations by Mexico allows foreign investors to seek recourse to international arbitration. Given the far-reaching impact of the measures outlined in the Hydrocarbons Reform, a strong case can be made that Mexico will be deemed to have violated such investment obligations vis-á-vis its foreign investors in the hydrocarbon sector.