MEXICO ENERGY ALERT: Recent Regulatory Measures Impacting the Oil & Gas Sector

During the first half of May 2021, the Mexican government passed a controversial amendment of Mexico’s Hydrocarbons Law and revoked over a hundred oil and gas marketing permits. These measures are part President Andrés Manuel López Obrador ("AMLO")’s plan to reverse the energy reforms introduced by former President Enrique Peña Nieto in 2013, which liberalized the energy market and narrowed the role of the state-owned company Petróleos Mexicanos (“PEMEX”). Mexico’s local and foreign direct investment in the energy sector dramatically increased after the 2013 energy reforms.  However, the current administration appears to be determined to shift the control of Mexico’s energy industry back to the Government and PEMEX. In this short post, we discuss Mexico’s recent legal and regulatory measures in the oil & gas sector.

In December 2020, the Secretary of Energy (“SENER” by its acronyms in Spanish) issued new Hydrocarbon and Fuel Import and Export Rules (The “New Import/Export Rules”), which sought to limit the ability of private companies to import and export fuel and hydrocarbons, thereby strengthening PEMEX’s market position. The New Import/Export Rules established summary proceedings to revoke existing import/export permits, and shortened the term of new import/export permits from 20 years to 5 years.

The New Import/Export Rules also contain provisions potentially hindering applicants’ opportunities to obtain new permits by: (i) introducing requirements that applicants demonstrate that the export of hydrocarbons will not impact domestic supply in the medium and long term; (ii) stating that applications are deemed rejected if SENER fails to issue a resolution within twelve business days; and (iii) allowing SENER to consult with state-owned companies, such as PEMEX, to determine the convenience of granting permits.

On May 5, 2021, the Mexican government enacted a decree that amended the Hydrocarbons Law (the “First HL Reform”), which is anticipated to have a negative impact on companies in the downstream and midstream sector. The most controversial aspects of the First HL Reform include that:

• the SENER and the Mexican Energy Regulator (“CRE” by its acronym in Spanish) can suspend or revoke hydrocarbon permits[1] if there is imminent danger to national security, energy security, or the national economy (Article 59 Bis);
• the government can temporarily occupy the facilities of permit-holders “to safeguard the national interest” and can hand over the operation of such facilities to State-owned entities, such as PEMEX (Article 57);
• import, marketing, and distribution permits are subject to meeting the storage capacity determined by SENER (Article 51.III) – a requirement that has been reported to benefit PEMEX;
• permits that fail to comply with the storage capacity requirement will be revoked (Fourth Transitory Provision);
• permits that do not comply with the legal requirements of the Hydrocarbons Law will be revoked upon the decree’s entry into force (Sixth Transitory Provision); and
• the default rule on permit processing procedure is changed from automatic authorization to automatic denial if the regulator has not issued a decision within ninety days (Article 53).

Separately, on May 14, 2021, the CRE revoked 139 oil & gas marketing permits on the basis that the permits had not been used for over a year.

On May 19, 2021, a second amendment to the Hydrocarbons Law was published in the Mexican Official Gazette (the “Second HL Reform”). The Second HL Reform terminates the mandate given to the CRE to enforce asymmetric regulation in hydrocarbon, oil and petrochemical markets. This means that the CRE will no longer be able to regulate PEMEX’s “First Hand Sales” (previously, CRE had regulatory oversight to ensure that when PEMEX’s products were sold to competitors, the pricing was based on regulated and transparent methodologies, using internationally accepted practices in the petrochemical and hydrocarbon markets. The sale was also subject to CRE’s approval).

All of the above reforms were suspended by local courts shortly after being enacted as a result of interim measures granted in Amparo actions. The New Import/Export Rules were suspended on March 3, 2021; the First HL Reform was partially suspended on May 17, 2021 (Article 57 and the Fourth and Sixth Transitory Provisions); and the Second HL Reform was suspended on May 31, 2021. In all cases, the suspension applies not only to the claimant in the proceedings, but rather erga omnes to the entire sector, in effect freezing the reform for the duration of the court proceedings.  While these suspensions should bring some temporary comfort to investors, we understand that, the matter is likely to make its way through the legal system and ultimately be decided by Mexico’s supreme court.

AMLO had said he would attempt a constitutional change in the second half of his term if the courts struck down the ongoing energy sector reforms. However, AMLOS’ party failed to secure a supermajority in both chambers at the midterm elections on June 6, 2021, drastically reducing the likelihood that the government will be able to pursue constitutional changes. Still, AMLO’s party and its allies were able to secure a simple majority in the lower house, and it would still have a supermajority in the Senate, where seats were not at stake in the mid-terms. Mexican analysts consider that it is likely that AMLO will continue to pursue regulatory changes that attempt to strengthen state-owned enterprises through legislative changes that a simple majority can approve.

[1]       This includes: (i) permits granted by SENER for the treatment and refining of oil, the processing of natural gas, export and import of hydrocarbons and petroleum products; and (ii) permits granted by the CRE for transportation, storage, distribution, compression, liquefaction, decompression, regasification, commercialization and sale to the public of hydrocarbons, oil or petrochemicals, and management of integrated systems.