New Priorities, Same Laws

The possibility of permanent changes to Mexico’s energy laws sparked speculation and uncertainty across the industry that dominated President López Obrador’s transition to power and first months in office. But no change took place and the laws passed as part of the Energy Reform package have remained in place. However, the new administration’s focus has changed the institutional goals of entities both public and private, and there have been indications of a direct approach to influence and regulate the sector’s activity. Most notably, CNH suspended upcoming bidding rounds until further notice. Rather than being part of a strategy to block new operators, the suspension can be interpreted as part of the transition process. In essence, the bidding rounds needed to be suspended as the government laid out the fundamentals of PEMEX’s current and future portfolio.

That notion was clear from the start of the current administration. PEMEX is to be at the center of the government’s energy policy. This was partly reflected in PEMEX’s new slogan, “Por el rescate de la soberanía,” (For the Recovery of Sovereignty). The rhetoric brought to mind the nationalist sentiment that ties Mexico’s national identity to public ownership and administration of oil and gas resources. This was the source of much of the reigning uncertainty. López Obrador was against the enactment of the Energy Reform, believing it would violate the constitutional nature of expropriation and public ownership of resources. During the elections, López Obrador toned down his discourse by promising to respect all international and national contracts. So far, the president has kept that promise, and as a result the industry’s legal framework is considered stable. Enrique González, Founding Partner of the González Calvillo law firm, says the situation reflects more talk than action. “The largest projects are moving full speed ahead without any interruption. I suspect this is because for all the noise emanating from the administration there has been no legislative change as of yet. While we do not necessarily like the rhetoric being used, we understand that this is not a step backward.”

Despite these changes, confidence from investors has not waned. “Mexico has a very robust and solid legal framework that supports all investors in the upstream, midstream and downstream sectors,” says Eduardo Nuñez, Managing Partner at Nuñez Rodríguez & Asociados. “It also has a variety of international trade agreements that strengthen its legal framework even more.” Gonzalez echoes this optimism when referring to his clients. “None of our clients have canceled projects or said they want to leave the country. Most, if not all our clients remain cautiously optimistic and many have expanded operations.”

While the suspension of further bidding rounds and the consolidation of PEMEX’s asset portfolio has meant that new licensing, production-sharing, profit-sharing and farmout contracts are not being offered or sought, PEMEX will be expanding the modality of service contracts that it will be tendering to make sure its goal of production growth can stimulate the national industry. The government has also expressed an interest in reinitiating farmouts for deepwater activities, as their lack of immediate profitability and greater need for investment should keep them away from PEMEX’s purview. Rubén Cruz, Lead Partner of Energy and Natural Resources at KPMG Mexico, says this will likely become the industry’s modus operandi. “We believe these types of processes and resulting service contracts will be the prevailing model of the industry going forward, rather than the much more specific service contracts that have been issued by PEMEX up to this point, such as that signed with Marinsa.” Cruz understands there are matters that remain unresolved. “Of course, it will be up to SENER to redistribute responsibilities over remaining assets and assignments between PEMEX and CNH.” This triangulation is a big part of what will become the new de facto legal framework of the industry: SENER will be in charge of establishing responsibilities and jurisdictions between PEMEX and CNH. An example of this was SENER’s re-assignation of CNH’s Round Zero blocks to PEMEX, after some were scheduled to be removed from PEMEX’s portfolio given that their minimum development goals had not been met by the impending deadline. This reassignment allowed SENER and CNH to give PEMEX more time to develop these fields without breaking their own rules or, in legal terms, giving PEMEX special treatment.

International legal issues were also resolved after the president established a deal between CFE and pipeline operators, such as Carso Energy, TC Energy, Fermaca and IEnova. After a dispute between these parties, CFE stopped operations for some of their transnational pipelines. While uncertainty will continue to exist due to geopolitical maneuvering, the existing oil and gas trade will continue to be active, backed by a sturdy infrastructure and legal framework that is necessary for investors to continue expanding their businesses.