Tuesday, October 19

Hydrocarbons Law: Mexico opens the door to expropriation in the hydrocarbons sector

The president of Mexico, Andrés Manuel López Obrador, at a Pemex plant in early 2020.
The president of Mexico, Andrés Manuel López Obrador, at a Pemex plant in early 2020.Handout . / Reuters

Andrés Manuel López Obrador hinted at it at the end of March, when he sent the initiative to the Chamber of Deputies. The counter-reform of the hydrocarbons sector seeks to facilitate the suspension of permits for private companies in the name of what the president calls “energy sovereignty.” “It is imperative to strengthen the productive companies of the Mexican State as guarantors of security”, reads, in reference to Petróleos Mexicanos (Pemex) the text sent to the Legislative Power that this Wednesday has had the approval of the plenary session of the lower house. The proposal will face many obstacles, as it contravenes not only the energy constitutional reform approved by the previous Administration, but also trade agreements with the United States and Canada, and the European Union.

The reform to the Hydrocarbons Law, approved by 292 votes in favor compared to 153 against and 11 abstentions, opens the possibility that the Government expropriates the operations of private companies, explains the analyst specialized in energy Gonzalo Monroy. “It has to do with the arbitrary, indefinite suspension,” says Monroy. “Combined with the possibility that the State can supplant with the State company [u otro] in operations, without compensation involved, it is very bad ”. The initiative would allow the State to allege that for undermining national or energy security, or the national economy, private operations that have permits to operate may be intervened. It would be up to the permit holder, says Monroy, to demonstrate that the situation has been resolved and would have to do so “without compensation or recognition of costs or consideration for use of the facilities.”

These three conditional, that is, attacks against national security, energy security or the national economy “are three concepts that mean everything and mean nothing,” says Óscar Ocampo, energy sector analyst and researcher for the non-profit organization. profit the Mexican Institute for Competitiveness (IMCO), “because there are no criteria of what is something that puts these things at risk. That is what is the most dangerous part of the initiative, that the criteria under which the Ministry of Energy and the Energy Regulatory Commission will operate are not clear. “

Ocampo agrees with Monroy that this is a proposal that, unlike the one sent by the president to reform the electricity sector, “there is proper talk of a direct expropriation”, since the State would have the power that a productive company of the State can operate in private facilities. “This reform is a tailored suit to benefit Petróleos Mexicanos and therefore has no component of better services or better prices,” says Ocampo. If it passes, Ocampo expects it to face multiple legal protections and obstacles, since it agrees to regional trade agreements such as the Trans-Pacific, as well as the T-MEC with the US and Canada and the agreement with the EU.

On April 8, the Federal Economic Competition Commission recommended to Congress not to approve this initiative, arguing that “if approved in its terms, the initiative with a draft decree that reforms and adds the Hydrocarbons Law would negatively affect the competition process. and free competition of the hydrocarbon, oil and petrochemical value chain, 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 for them. ”.

The impact on the Mexican economy will not only be affected in terms of competition, but also in the uncertainty and legal problems in which investors remain in the country. The proposed reform would be retroactive, explains Monroy, so that “companies that could export oil, as a result of the reform passed in the previous Administration, can no longer do so freely. This is a direct violation of contracts ”.

This counter-reform, according to the first draft of the text, replicates the philosophy of the reform of the electricity system, which was paralyzed by the courts and that López Obrador has threatened to unblock through a constitutional reform. The president intends to bury the inheritance of his predecessor, Enrique Peña Nieto, in all areas, but the energy sector is probably the spearhead of that purpose. And like the electricity reform, despite the suspension by the courts, it has become a disincentive for investment and if it finally comes into force it will have a very harsh economic and environmental impact, according to experts, also the changes proposed to the Hydrocarbons Law concerns the productive sectors.

The IMCO highlights that the law “would affect the already deteriorated investment climate observed in the energy sector since the beginning of the current Administration and especially since the recent approval of the reform to the Electricity Industry Law by threatening the Rule of law”. To this is added the vertigo deficit accumulated by the parastatal company that would benefit from the plan. Pemex accumulates more than 110,000 million dollars of debt and López Obrador intends in some way to rescue it. “In order to maintain its preponderant role in the hydrocarbon sector, this reform proposal seeks to displace the private sector that participates in such activities,” continues IMCO in a statement.

The Government and the president’s party, Morena, are determined to approve the new law by express means, as happened with the electricity reform and in view of the renewal of the Chamber of Deputies in the elections on June 6. After the approval in the Energy Commission, the discussion of the law has immediately passed to the Plenary, where the opposition has expressed its most absolute rejection of the initiative. The PRI and the PAN have described the reform attempt as unconstitutional. The Citizen Movement has dismantled López Obrador’s argument that these legal changes would help fight corruption. The Green Party, Morena’s ally in Congress, has also criticized the initiative, warning that eliminating competition may also have environmental repercussions. The government formation defended the project as a tool to combat the huachicoleo or illegal fuel trafficking.

Its scope goes much further, however, and impacts on the Mexican economy, on the perception that investors have of the country and continues on the path taken by López Obrador, who in his six-year term seeks to leave a mark on the energy sector. According to the thesis of the consultant David Shields, he wants to make history at the expense of the electricity and hydrocarbons sector: “In Mexico, the nationalist presidents who expropriated and nationalized are the great heroes.”

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