Monterra to Sue Mexico Under International Arbitration
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Monterra to Sue Mexico Under International Arbitration

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María José Goytia By María José Goytia | Journalist and Industry Analyst - Wed, 03/02/2022 - 08:52

Monterra Energy has notified the Mexican government of its intentions to launch international arbitration under NAFTA and USMCA for the suspension of operations of its fuel import terminal in Tuxpan, Veracruz. If Monterra moves forward, experts fear that the legal case may cause tremendous damage to Mexico’s reputation as an investment destination.

Monterra Energy, a company owned by US-based investment firm KKR, announced that it intends to sue the Mexican government to recover the value of its fuel-storage terminal in Tuxpan. The facility was closed at gunpoint on Sept. 14, 2021 by Mexican regulatory authorities and the National Guard. Since then, it has not been allowed to operate.

Monterra’s Tuxpan terminal stored imported gasoline from the US, which was then distributed to Mexican service stations, owned and operated by various private companies. The Tuxpan terminal is part of a portfolio of roughly US$500 million that companies invested in Mexican gasoline and diesel storage facilities following the liberation of the energy sector in 2014.

Notices of intent under international agreements provide for an initial phase of negotiation and consultation to resolve a dispute, essentially seeking to avoid international arbitration. In the notification sent to Mexico’s Ministry of Economy (SE), Monterra investors seek US$667 million in compensation, plus interest and legal costs.

Still, Monterra’s investors are not yet going to court. They have only notified Mexico of their “intent to submit claims to arbitration” under the NAFTA and USMCA agreements. Following its recent renegotiation, USMCA provides parameters for the filing of a claim to arbitration regarding existing investments.

In May 2018, regulator CRE issued a 30-year permit to Monterra’s Mexican subsidiary “for the design, construction, and operation of a storage facility for refined oil products.” After President López Obrador took office, uncertainty caught the energy sector as the president was determined to overthrow the energy reform in favor of state production companies CFE and PEMEX.

Monterra’s investors say they remain confident in their Mexican investments. They stayed in constant communication with the Mexican Energy Regulator (CRE) and complied with all documentary requirements. A September 2020 revised request for approval of storage rates received no response, which meant that by law it was “automatically approved.”

Throughout most of 2021, the regulatory environment turned increasingly difficult for the company. WSJ reported CRE constantly “harassed Monterra with duplicative and pretextual requests for information and documents that had already been delivered.” Monterra complied and continued with the construction of the terminal, while keeping CRE informed of its progress. Finally, CRE arbitrarily closed the terminal in September 2021.

Audits of fuel terminals are one of several ways with which the Mexican government has been weakening the position of private fuel importers. The government has also passed laws that make importing harder for private companies and has canceled the permits needed to introduce such fuels to the country.

Even if a financial settlement is achieved between the Mexican government and Monterra, experts say that the damage caused to the country’s reputation as a prime investment destination will be significant. The energy sector has faced uncertainty as President López Obrador is pushing for new energy reform, which would consolidate CFE and PEMEX’s position above private sector participants. This instability has drastically decreased FDI in Mexico, especially in the energy sector, which saw decade-low investments in 2021.

"We have done more than could be expected to cooperatively resolve this issue, to continue supporting Mexico's economy and energy security and to provide well-paying jobs," assured Arturo Vivar, CEO, Monterra through a statement. Vivar assured there were repeated attempts to resolve the closure, including another show of evidence regarding the company’s full compliance with regulation. Nevertheless, Mexican authorities ignored the evidence and local courts left the company defenseless.

"We simply ask that Mexico safeguards rule of law and complies with its obligations under international treaties. Our preference would be to reach an amicable resolution, but the actions taken so far by the Mexican government leave no alternative but to pursue all available legal options," said Vivar.

Monterra would become the first company to take Mexico’s government to international arbitration during the López Obrador administration. Monterra’s further actions may set new standards for companies harmed by Mexico’s protectionist course of action.

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