Mexico paves the way for expropriations in hydrocarbon sector

RIO DE JANEIRO, BRAZIL – Andrés Manuel López Obrador had given the password at the end of March, when he sent the initiative to the Chamber of Deputies. The counter-reform of the hydrocarbons sector seeks to simplify the suspension of exploration permits for private companies in the name of what the president calls “energy sovereignty.”

“It is imperative to strengthen the productive companies of the Mexican State as a guarantor of security,” states the text passed Wednesday by the lower house of Congress, in a reference to state-owned Petróleos Mexicanos (Pemex). The initiative will still face many obstacles, since it violates not only the energy constitutional reform approved by the previous Administration but also trade agreements with the United States, Canada and the European Union.

The reform of the Hydrocarbons Law, passed with the favorable votes of 292 deputies, as well as 153 against and 11 abstentions, opens up the possibility that the government can expropriate the operations of private entities, according to energy analyst Gonzalo Monroy. “This has to do with an arbitrary, indefinite suspension,” Monroy says.

“Combined with the possibility that the state can replace [private parties] with the state’s [or a third party’s] company in the operations, without compensation, it’s a very bad thing.”

The initiative would allow the state to claim that, because it threatens national or energy security, or the national economy, the operations of private companies that have concessions to operate may suffer intervention. It would then be up to the concession holder, according to Monroy, to demonstrate that the situation has been resolved, and in the meantime they would not be entitled “to compensation or recognition of costs or consideration for use of their facilities.”

These three conditions -threat to national security, energy security or the national economy- “are three concepts that mean everything and mean nothing,” says Óscar Ocampo, an energy sector analyst and researcher with the non-profit Mexican Institute for Competitiveness (IMCO), “because there are no criteria about what puts these things at risk. That’s the most dangerous thing about this initiative: that the criteria under which the Energy Secretariat and the Energy Regulatory Commission are going to operate are not clear.

Ocampo agrees with Monroy in pointing out that in this proposal, unlike the presidential initiative to reform the electricity sector, “there is talk properly of a direct expropriation,” since the state would have the authority to impose that a state production company can operate in private facilities.

“This reform is a tailored suit to benefit Petróleos Mexicanos, and therefore has no component of better services or improving prices,” Ocampo notes. If passed in the Senate, Ocampo expects it will face several injunction requests and legal hurdles because it contradicts regional trade agreements such as the Transpacific, the T-MEC (with the US and Canada) and the agreement with the European Union.

On April 8th, the Federal Economic Competition Commission recommended that Congress not approve counter-reform, arguing that, “if approved in its terms, the legislative project that reforms and extends the Hydrocarbons Law would negatively affect the process of competition and free competition in the hydrocarbons, petroleum and petrochemicals value chain, which could result in a decrease in the supply of goods and services in the industry, with a consequent increase in prices paid by Mexican households and businesses.”

The impact on the Mexican economy would not only be affected in terms of competition, but also by uncertainty and legal confusions involving investors. The proposed reform would be retroactive, Monroy explains, so “companies that could export oil thanks to the reform approved in the previous Administration will now no longer be able to do so freely. This is a direct violation of contracts.”

The counter-reform project repeats the philosophy of the electricity system reform, which has been paralyzed in the courts and which López Obrador has suggested unlocking through a constitutional reform.

The president intends to bury the legacy of his predecessor Enrique Peña Nieto in all areas, but the energy sector is probably the spearhead of this purpose. And, just like the electricity reform -which, although suspended by the courts, has become a disincentive for investment, and if it goes into effect it will have a harsh economic and environmental impact, according to experts-, the changes in the Hydrocarbons Law also worry the productive sectors.

IMCO highlights that the law “would affect the already deteriorated investment environment that has been observed in the energy sector since the beginning of the current administration and especially since the recent approval of the reform of the Electricity Industry Law, as it goes against the rule of law”. To this is added the vertiginous deficit accumulated by the parastatal company that would benefit from the plan.

Pemex totals more than US$110 billion dollars (R$622 billion) in debt, and López Obrador intends to somehow rescue it. “With the purpose that it maintain its preponderant role in the hydrocarbons sector, this reform proposal seeks to push aside the private sector that participates in these activities,” IMCO continues in a statement.

The government and its Morena party are determined to pass the new law by express means, as happened with the electricity reform, with an eye on the election of the new Chamber of Deputies on June 6. After the approval in the Energy Commission, the discussion of the law went on to the plenary, where the opposition expressed its most absolute rejection of the initiative.

The PRI and PAN parties qualified the reform attempt as unconstitutional. The Citizen Movement dismantled López Obrador’s argument that these legal changes would help fight corruption, while the Green Party, a Morena ally in Congress, also criticized the initiative, warning that the elimination of competition could also have environmental repercussions. López Obrador’s party defended the bill as a tool to combat huachicoleo, or illegal fuel trafficking.

But its scope goes far beyond this, impacting the Mexican economy by strengthening investors’ perception of the country and the path taken by López Obrador, who in his six-year term seeks to make a mark in the energy sector. According to consultant David Shields, he wants to make history at the expense of the electricity and hydrocarbons sectors: “In Mexico, the nationalist presidents who expropriated and nationalized are the great heroes,” he comments.

Source: El Pais