New developments in the Mexican energy sector generate uncertainty

Since 2020 and throughout 2021, the Mexican Government has enacted a series of measures and reforms that seek to strengthen the role of the Federal Electricity Commission (Comisión Federal de Electricidad or CFE) and Petróleos Mexicanos (Pemex) in the Mexican energy sector. These reforms have been regarded as barriers to the free market and have discouraged private investment in the sector.

As of this writing, the Mexican Judiciary has demonstrated its independence and adherence to the rule of law, by declaring such measures unconstitutional. However, recent events and enactments continue to generate criticism and uncertainty, according to various organizations and stakeholders in the industry, including:

• The enactment of new measures that hinder the import and export of hydrocarbons by private parties;
• The revocation of some of the interim measures that suspended the entry into force of the reforms to the Mexican Electric Industry Law (Ley de la Industria Eléctrica or LIE) and the Mexican Hydrocarbons Law (Ley de Hidrocarburos or LH); and
• Other relevant events in the sector, such as the decision of the Mexican Ministry of Energy (Secretaría de Energía or Sener) to benefit Pemex in the shared Zama oilfield and the implementation of maximum prices in the liquefied petroleum gas (LPG) market.

In this alert we briefly describe the relevant measures implemented since our last alert, as well as some of the criticisms and comments that have been made in this regard.

It should be noted that on September 30, 2021, the President of Mexico filed a Constitutional Reform Bill in the Chamber of Deputies to dismantle the electricity legal framework derived from the 2013 Energy Reform and grant a dominant role to the CFE; which we describe in a separate alert.

Amendments to the General Rules of Foreign Trade and Revocation of Permits

On June 11, 2021, the Mexican Tax Administration Service (Servicio de Administración Tributaria or SAT) published in the Federal Official Gazette (Diario Oficial de la Federación or DOF) the Seventh Resolution of Amendments to the General Rules of Foreign Trade for 2020 (Séptima Resolución de Modificaciones a las Reglas Generales de Comercio Exterior para 2020). In particular, the amendment to rule 2.4.1. (which went into effect on June 12, 2021) has generated uncertainty among investors in the sector.

The amendment implies that only State-owned productive companies (Pemex or CFE) and their subsidiaries can obtain (i) the authorization to import or export hydrocarbons, fuels, petrochemicals, and other products from a place other than the authorized location or, (ii) the extension of such authorization.

In other words, private investors may only import and export said products through customs, customs sections, international airports, authorized border crossings, ports, railway terminals that have customs services, and the other locations set forth in article 9 of the Regulation of the Customs Law (Reglamento de la Ley Aduanera); while the State-owned companies will not be bound by such restrictions.

In the words of the American Chamber of Commerce Mexico, the amendment, among other things, “[s]ignificantly restricts the private sector’s options to import petrochemicals and hydrocarbons to Mexico” and “[p]uts at risk the continuity and execution of business plans and investment projects in the development of new supply chains and infrastructure in the energy sector.”

ICC Mexico, in a statement dated July 15, 2021, held that the amendment “will affect production chains, jobs and investment" and “[i]t is discriminatory because only the State-owned companies will be able to have such authorization.”

In this context, by means of a communication dated July 19, 2021, the SAT reported on the suspension of more than 80 private companies from the registry of importers, for allegedly, not complying with a series of requirements under the Mexican Foreign Trade Rules (Reglas de Comercio Exterior), such as holding valid permits or carrying out foreign trade operations within a certain period.

In this regard, it should be noted that the Mexican Energy Regulatory Commission (Comisión Reguladora de Energía or CRE) has canceled more than 200 permits this year, which has stalled the fuel market and may even cause a shortage of certain products due to the closure of storage terminals owned by private investors.

Revocation of suspensions upon the entry into force of the reforms to the LIE and the LH

As we previously mentioned, even though more than five thousand amparo actions are stalled and without a docket number, the Mexican Judiciary has managed to halt the entry into force of some of the most controversial measures adopted by the current Mexican Government. As of the date of this publication, for example:

• The decree to reform the LIE, published in the DOF on March 9, 2021, has been permanently suspended due to various amparo^[1] constitutional challenges filed against it by private investors;
• Some of the most controversial provisions derived from the Decree to reform the LH of May 4, 2021^[2], were suspended indefinitely by federal judges as a result of the amparos filed against them; and
• Additionally, on May 31, 2021, two federal judges suspended with general effect the May 19, 2021, reform to the LH.

Even though said suspensions have managed to contain, to some extent, the effects of the reforms (which we analyze in greater detail in two previous articles^[3]), on July 1 and 15, 2021, respectively, the First and Second Collegiate Courts Specialized in Economic Competition declared inadmissible two of the dozens of suspensions that were granted regarding the entry into force of the LIE reform.

Among other things, the Magistrates held that the reforms still do not affect private investors, because the third transitory provision of the Decree to reform the LIE establishes that the competent authorities shall have a period of 180 days “to make the necessary modifications” to all regulatory instruments “in order to align them” with the provisions of said Decree, which has not occurred yet.

Following this criterion, in early September 2021, the Collegiate Courts Specialized in Economic Competition declared inadmissible the interim measures that suspended the entry into force of the May 4, 2021 reforms to the LH , since these reforms "do not cause harm for their sole entry into force.” Consequently, one of the two judges who granted the suspensions requested by the investors, recently ordered the dismissal of the rest of the amparo actions filed against that reform and that had not yet been admitted for processing.

Given that the suspensions granted against the entry into force of the reforms to the LIE and the LH were made with general effect, for the time being, these reforms remain suspended as long as the remaining suspensions granted against them are not lifted. However, the fact that the two competent Collegiate Courts have revoked these suspensions may establish a precedent that may be gradually applied to the other suspensions, until the reforms in question enter into force.

Under the standard set by the Magistrates of the Collegiate Courts, once the regulations derived from the reforms to the LIE and the LH are applied, it is conceivable that the entry into force of said measures will be suspended again because of the amparos asserted against them.

Finally, it should be noted that the Mexican Supreme Court declared inadmissible the unconstitutionality action (acción de inconstitucionalidad) brought by a group of senators against the entry into force of one of the reforms to the LH, due to the lack of autograph signatures in said document.

Other relevant events

In this context, a series of additional events have occurred that have generated uncertainty among private investors in the sector:

• On June 30, 2021, Sener published the Program for the Development of the National Electricity System 2021-2035 (Programa para el Desarrollo del Sistema Eléctrico Nacional 2021-2035 or PRODESEN). This PRODESEN “is an update of the previous document” and it “defines the planning of the National Electric System” and, among other things, indicates that “it is necessary to contemplate the recovery of the generation and transmission capacity of the [CFE], so that it is the State company that generates and supports the [National Electric System].”

• In connection with the dispute over the operation of the “Zama” oil field (with a potential output of 600 million oil barrels), after its unification and the disagreement on its operation between Pemex and Talos Energy, a US oil company, on July 2, 2021, Sener determined that Pemex (and not Talos) has the rights to the majority of the field, the financial capacity and the infrastructure to operate it, thus it will operate the entire field.

  This, despite the fact that Pemex, one of the 10 most indebted companies in the world, affirmed that it owned most of the deposit without having filed any evidence and having ruled out drilling an appraisal well, while Talos invested in the studies, drilling of wells and other actions that, in 2017, led to the discovery of said oil field.

  Consequently, in a statement dated July 5, 2021, Talos stated that it was "disappointed" with the decision and that it would "explore all legal and strategic options." To that end, on September 3, 2021, Talos announced that it filed a notice of dispute against the Mexican government under USMCA Chapter 14.

• On July 28, 2021, Sener published an “Emergency Directive” whereby, among other things, “it urges CRE to establish a methodology that sets maximum prices for the final consumer of LPG.” The following day, the CRE published Resolution No. A/024/2021, where it established such framework (resolution).

  The resolution subjects all holders of permits for (i) commercialization, (ii) distribution and (iii) sale to the public of LPG^[4] to maximum prices pursuant to the criteria set forth therein: within a six-month period, the prices are established by region, according to a methodology based on a "standard facility” and are determined and published weekly by CRE. Furthermore, the resolution obliges permit holders to report their sale prices. In the event of non-compliance, the resolution provides that the CRE may revoke the permit in question.

  The foregoing will trigger another legal battle between private investors and the State, since said measures, inter alia, were issued without a declaration of non-competition by the Mexican Federal Economic Competition Commission (Comisión Federal de Competencia Económica) and hinder the free market scheme under which the sector operated.

  Additionally, the 2022 Tax Regulations (Miscelánea Fiscal 2022), proposed by the Mexican Ministry of Finance (Secretaría de Hacienda y Crédito Público), would oblige LPG vendors to implement new volumetric controls within a period of six months, which would imply millionaire investments, despite the fact that their profit margins were severely reduced by the resolution.

• As a result of the measures adopted by the Mexican State in favor of Pemex and CFE, on July 20, 2021, 20 members of the United States Congress sent a letter to President Biden stating that “the Government of Mexico recently enacted legislation cementing its protectionist energy policies and severely limiting US companies access to the hydrocarbon and renewable markets.” Such concerns were reiterated by the Alliance for Trade Enforcement (AFTE) in a letter addressed to the Vice President Harris on September 7, 2021.

As a result of the measures adopted since 2020, it is recommended that investors who have participated in projects in this sector in Mexico consider the rights and potential resources they hold, both at the local jurisdictional level, as well as those under the applicable investment treaties or other international instruments.

In this regard, please see our series of alerts on the potential for investment treaty claims arising out of measures taken by States in response to the COVID-19 pandemic:

• President of Mexico files constitutional reform bill on electricity (October 7, 2021)

• Reforms in the energy legal framework in Mexico and challenge mechanisms (June 4, 2021)

• Mexico's Hydrocarbons Law Reform Bill: A controversial new measure in the Mexican energy sector (April 8, 2021)
• Reform to the Electric Industry Law: a new risk for energy projects in Mexico (March 10, 2021)
• New measures threaten investments in the Mexican energy sector (July 14, 2020)
• Mexican renewable energy projects affected by new measures (May 19, 2020)
• COVID-19 and investment claims under NAFTA (May 15, 2020)
• State defenses to investment claims arising from COVID-19 (April 29, 2020)
• COVID-19 – a legitimate basis for investment claims? (April 21, 2020)

If you have any questions regarding these new requirements and their implications, please contact the authors, any member of our Energy team or your DLA Piper relationship attorney.

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