Reading Between the Lines of Mexico’s New Energy PoliciesBy Pedro Alcalá | Wed, 07/14/2021 - 13:16
Given the relative degree to which Mexico’s regulatory framework for its oil and gas industry has remained consistent throughout last year, conversations about its context cues and the future is what dominated the first panel of Mexico Oil & Gas Summit 2021, entitled “Mexico's Evolving Legal & Regulatory Landscape”.
The panel was moderated by John Padilla, Managing Director of IPD Latin America, who began his remarks with an analysis of the macro global context that had impacted the industry’s legal circumstances over the last year. This included the fluctuations in demand and prices that the pandemic created, coupled with the increasing urgency of the energy transition expressed by the US Presidential election of Joe Biden. Padilla balanced these contextual elements considering recent and nationally specific ones such as the results of Mexico’s midterm elections. Padilla combined these into a list of eight main factors that he identifies as the main drivers of change in the industry at this current time, which were, in his own words, “the cancellation of the asymmetric regulation in natural gas, modifications to the permits of imported and exported energy products, changes to the Hydrocarbons Law, 700 protections in the energy sector, a decree from SAT regarding imports and exports of fuels, the announced creation of Gas Bienestar, the attempted Electric Reform and SENER’s recent decision regarding the unitization of Zama.”
The first panelist to comment was Yolanda Villegas, Founding Partner at Oleum Servicios y Dictaminaciones. She began by explaining the context for the current legal circumstances beginning with the first cases of COVID-19 being reported in China, which had an immediate impact on oil product demand at a global level. Villegas said this was the main catalyst for everything that was to follow because from this event came a chain reaction or a domino effect that led to everything else. Regarding the legislative initiatives that have taken place in Mexico throughout 2021 to change the energy sector’s regulatory framework, Villegas highlighted the impact of the midterm elections, saying that “constitutional reforms have become less likely after the midterm election due to the difficulty of forming the necessary coalitions; however, we can expect that the attempt will be made nonetheless.”
Panelist David Enriquez, Senior Partner at Goodrich, Riquelme & Asociados, agreed with Padilla on the importance of Biden’s election as a catalyst for the acceleration of the energy transition, which reshapes all incentives in the global energy market. Enriquez made a particular emphasis on how the energy transition influences the way in which banks and institutional investors behave in relation to the oil and gas sector. In the case of Mexico, Enriquez coupled this international context with his personal estimation that “all of this government’s energy sector policies have been regressive and inconsistent with Mexico’s climate change international agreements, not to mention international climate change targets.” One of the examples that he used to illustrate this evaluation is the way in which CFE power plants have reversed course in terms of phasing out fuel oil since they are now taking in more of this commodity than previously accepted and being reconverted to take in even more in the future, a process that in Enriquez’s view damages the plants, while also challenging global environmental trends.
A counterpoint to this critical perspective was presented by panelist Rafael Espino de la Peña, Founding Partner of Fernandez, Espino & Asociados and Independent Adviser of PEMEX, who said the political handover that occurred in 2018 has to be understood in terms of its broad mandate and its desire for institutional changes that strengthen PEMEX and provide Mexico with energy sovereignty in addition to energy policies that generate wider collective benefits through more ethical processes. He mentioned the currently increasing price of oil as an example of accomplishments achieved by current policies, given the positive impact that it will have on PEMEX’s operational flow. “Mexico has an energy deficit, which is what the new energy reform tries to fix. It wants PEMEX to watch over companies working in the country,” said Espino.
In regards to the kind of tools industry players have to protect their legal and contractual rights, Enríquez stated that in the upstream sector he has yet to see the more “radical” approaches to policy changes that occur in the downstream sector or in regulators such as the CRE, but that that does not mean that they will not happen in the future. Enríquez also identified weaknesses in the institutional design of the sector as decreed by the Energy Reform, since the events of the last two years have made it clear that policy makers do have the capacity to disrupt the normal functioning of regulators, which in theory should not be possible. Enríquez reported that in the upstream sector, most of the private operators’ projects are currently in an exploratory phase but that general activity in this sector is mostly focused on extraction, so it is worrying to see the fragile case of Zama discouraging future investment and possibly becoming a benchmarked criteria that will be extended to other similar situations. In this regard, the question for investors becomes, how to trust SENER’s standards to be objective.” This becomes, in Enríquez’s view, an additional concern for investors who are already being kept up at night by the industry’s debt situation. He also made it clear that the question of contractual rights was a tricky one because “solving problems in court is not a healthy standard or expectation for any industry to adopt.”
Villegas agreed with Enríquez’s points, adding that legal battles over contractual terms were usually long-term affairs that put all future investment in jeopardy and turned current investments into a conflict over damages and pending payments. She also addressed Espino’s statements by saying that political policies are not necessarily inherently positive or negative in ethical terms, but instead have to be understood in terms of their results. “More than 40 percent of COFECE's investigations are in the energy sector. This tells us something. We have to establish better communication with the government to attract investment,” said Villegas.