Mexico's Hydrocarbons Law Reform Bill: A controversial new measure in the Mexican energy sector

On March 26, 2021, Mexican President Andrés Manuel López Obrador filed a new bill to reform Mexico’s Hydrocarbons Law (Ley de Hidrocarburos or LH) in the Chamber of Deputies. Mr. Lopez Obrador’s party has a majority in the Mexican Congress and, as a result, it appears that the bill may be approved before the legislative period ends on April 30, 2021.

The bill essentially seeks to modify the established principles of free competition in the petroleum products market in order to grant Petróleos Mexicanos (Pemex), a Mexican state company, the same monopoly control it had over the national market before the 2013 energy reform. In its Statement of Purpose, the bill justifies the proposed reforms to the LH on the basis of the fight against corruption in the energy sector and the protection of national sovereignty.

On the one hand, the bill has laudable objectives, such as combating corruption and strengthening Pemex, but on the other, it uses these objectives to justify measures that may violate free competition and give the state control over the petroleum products market to the detriment of private investments in the hydrocarbons sector.

Foreign investors involved in energy projects in Mexico may wish to consider their rights and potential remedies under local law as well as under any applicable investment treaties and other investment instruments.

In this article, we analyze the content of the LH reforms proposed in the bill and their possible implications for the Mexican oil and gas sector.

The bill

The bill proposes the following:

• Minimum storage requirements
  
  

  The bill reforms the LH so that permits are subject to the condition that the interested party demonstrates, where appropriate, that it has the necessary storage capacity, as determined by the Mexican Ministry of Energy (Secretaría de Energía or SENER).

   

  To this end, the bill also provides that SENER and the Mexican Energy Regulatory Commission (Comisión Reguladora de Energía or CRE) shall revoke permits that, on the date of its entry into force, fail to comply with the storage requirement determined by SENER.

   

  As a result of this reform, all permit holders of any activity in the fuel industry – from refining, transportation, storage, distribution, marketing, to retailing – will require a storage commitment as determined by SENER. Failing this, their permits will be revoked.

   

• Negativa ficta for the assignment of permits and expiration
  
  

  The bill further seeks to reverse the effects of administrative silence by regulators regarding requested permit transfers. As a result, if the period set for the issuance of transfer permits elapses without an express resolution from the competent authority, this silence would be treated as a denial.

   

  Likewise, the bill states that the competent authority will deprive of legal effect any permits that have expired under article 55 of the LH.

• Revocation of permits
  
  

  The bill proposes the following two new grounds for authorities to revoke permits after more than one violation: (i) non-compliance with the provisions applicable to the quantity, quality and measurement of hydrocarbons and petroleum products, and (ii) any modification of the technical conditions of systems, pipelines, facilities or equipment without prior regulatory authorization.

   

  Further, the bill would empower SENER and CRE to revoke permits they have previously issued, in the event the competent authority issues a final resolution determining that their holders committed the crime of smuggling (contrabando) hydrocarbons, petroleum products or petrochemicals.

   

  Additionally, the bill provides that, upon its entry into force, permits that, subject to prior verification, do not comply with the bill’s requirements – which have not yet been specified – or violate the provisions of the LH, will be revoked.

• Suspension of permits and occupation of facilities
  
  

  The bill proposes to authorize SENER or CRE to temporarily suspend previously issued permits “when an imminent danger to national security, energy security or the national economy is foreseen.” The time period for any suspension would be exclusively “determined by the authority,” but may be indefinite in light of the fact that the bill does not provide any limits to the duration of such suspensions.

   

  In the event of suspension, "the authority that issued the permit may take over the administration and operation of the permit holder," and, for this purpose, "it may use the staff that the permit holder had been using, hire a new operator or a combination of the previous ones," among which, could be Pemex.

   

  The affected private party may request that the suspension be terminated, but it must be certain that the issues that caused the suspension have been corrected, cured, or have disappeared, so long as these causes were not criminal or administrative offenses related to fuels.

• Indemnity
  
  

  Finally, the bill provides that permit holders may seek financial compensation within the framework of the applicable regulations for any damages incurred as a result of any government action.

The consequences 

The bill was filed before the Mexican Congress just as various legal challenges against administrative provisions and the reform of the Electric Industry Law were being asserted. As a result, the Reform has been suspended by the federal courts. In this regard, the Office of the United States Trade Representative mentioned that the climate for investors in Mexico has deteriorated since last year.

In contrast to the Mexican electricity sector, to date, the legal framework of the hydrocarbons sector had not been subject to any modifications. It is worth mentioning that the bill does not propose to modify the legal framework, regarding the exploration and extraction of hydrocarbons (upstream).

However, organizations like the Enterprise Confederation of the Mexican Republic (Confederación Patronal de la República Mexicana or Coparmex) have stated that the bill generates uncertainty in the sector and exposes the country to legal ramifications both locally and internationally.

• Provisions of the bill which deserve special attention include those which propose to revoke permits upon its entry into force, if requirements imposed by the relevant authorities are not met.

• Additionally, administrative silence and inactivity to justify the denial of permit applications have recently become commonplace with regard to new investments in the Mexican fuel sector. Investors have experienced severe delays when requesting permits, as noted last year by Michael J. Sommers, President and CEO of the American Petroleum Institute (API), in a letter addressed to then-Secretary of State Michael R. Pompeo, among other senior officials in the US.

• The proposed reform regarding the suspension of permits is an issue that private investors should watch closely. The bill provides that the authority may suspend a permit in the face of “imminent danger to national security, energy security or to the national economy.” This is troubling for several reasons, including the fact that such terms are exceedingly broad, so they could lead to arbitrary decisions to the detriment of private investors. Additionally, the bill would make it possible for Pemex to take over the "administration and operation of the permit holder" for as long as the authorities decide, a situation which would lead to greater uncertainty among investors and potential abuses by the Mexican state. Indeed, such suspensions could be considered de facto expropriations.

• In general terms, the bill grants powers to SENER and CRE, which could be used to the detriment of private investments in the fuel market. The bill contains provisions that could violate fundamental principles enshrined in the Mexican Constitution as well as international treaties to which Mexico is a party, including the right to private property, legal security, free trade, free competition, equal and non-discriminatory treatment, among others.

As mentioned by the Mexican Institute for Competitiveness (Instituto Mexicano para la Competitividad or IMCO), “[t]he reform directly impacts companies that operate in these sectors by raising the costs of compliance with the new regulations on storage and by creating an environment of legal uncertainty before the regulatory authorities.”

As a result of the measures adopted in 2020, as well as those outlined in the bill, foreign investors involved in energy projects in Mexico may wish to consult with their advisors and consider their rights and potential remedies under local law as well as under any applicable investment treaties and other investment instruments.

In this regard, please see our series of articles on the potential for investment treaty claims arising out of measures taken by States in response to the COVID-19 pandemic:

• Reform to the Electric Industry Law: a new risk for energy projects in Mexico (March 10, 2021)
• New measures threaten investments in the Mexican energy sector (July 14, 2020)
• Mexican renewable energy projects affected by new measures (May 19, 2020)
• COVID-19 and investment claims under NAFTA (May 15, 2020)
• State defenses to investment claims arising from COVID-19 (April 29, 2020)
• COVID-19 – a legitimate basis for investment claims?(April 21, 2020)

If you have any questions regarding these new requirements and their implications, please contact the authors, any member of our Energy team or your DLA Piper relationship attorney.

Read this article in Spanish.