MEXICO: An Introduction to Energy & Natural Resources

Mexico: Energy & Natural Resources 

Contributed by Partners Derek Woodhouse and Luis Fernández

CMS Woodhouse Lorente Ludlow S.C. 

Regulatory challenges 

President Andrés Manuel López Obrador (AMLO) believes that Mexico is “suffering from a perverse energy reform, which was approved for looting, for theft, for the benefit of a minority at the cost of the suffering of Mexicans who have to pay more for energy” and that “we must repair the damage in whatever way possible.”

This explains why during the first two years of his administration (2019-2020) several policy decisions and regulatory amendments were implemented in order to prevent further private sector controlling participation in energy projects and to strengthen both state-owned companies (PEMEX and CFE).

However, most of these amendments have been successfully challenged by the private sector and their effects have been suspended or declared null and void by federal courts. This gave rise to a huge and unprecedented legal battle in which AMLO is not only facing private sector companies but also NGOs, state governors, senators and even the Federal Competition Commission. 

Despite the strong criticism received from the national and international press, NGOs, foreign governments, financial institutions, investment funds, professional boards and industry experts, AMLO has made it clear that his administration will continue to fight until the energy sector is back under the control of PEMEX and CFE for the benefit of all Mexicans.

This new energy policy, together with the suspension of bidding rounds, auctions and competitive tenders, a de facto regulatory paralysis, and other policy decisions implemented by the AMLO administration, gave rise to legal uncertainty and meant that the pipeline of energy projects in Mexico began to dry up in 2020. Most investors placed new projects on standby and focused their attention on maintaining the value of existing projects. Developers and equipment providers began to look for opportunities elsewhere.

Legislative challenges 

According to AMLO, “the legal and media battle brought against [his] regulatory amendments and energy policies has been sponsored by private sector companies, most of them foreign, who benefit from onerous contracts that were fraudulently assigned in previous administrations” and “this power-mafia and their accomplices are nothing but looters and thieves who almost bankrupted PEMEX and CFE; this will no longer be tolerated, and if the only way to achieve this goal is to amend the legislation, so be it.”

This explains why in the first quarter of 2021, AMLO submitted bills to Congress to amend the Electricity Industry Law and the Hydrocarbons Law. In both cases, the aim was not only to prevent further private sector controlling participation in energy projects and strengthen PEMEX and CFE, but to have the power to revoke existing licences and permits and to renegotiate existing contracts.

Despite the fact that both bills were approved by Congress in record time and without a single amendment, the new legislation has been challenged by private sector entities, NGOs and senators from the opposition. Their effects were initially suspended by federal courts until a final decision is reached; however, some of these injunctions have been revised and revoked by superior courts. It is still unclear who will win this important legal battle.

AMLO accused Mexican lawyers of “treason” for representing private sector companies in this battle and also accused federal judges of “corruption” for granting the injunctions that suspended the legal effects of the recently approved legislation, demanding a full investigation by the Supreme Court.

It will be up to the judicial branch of government to decide whether the new legislation is consistent with the Constitution and the final decision will most likely come directly from the Supreme Court. A ruling against the new legislation is the likely outcome, at least from a legal perspective, but the matter is heavily politicised, so anything is possible. A ruling in favour of the new legislation would be a win for AMLO, but would also give rise to dozens of international arbitrations brought by foreign investors who poured several billion dollars into the Mexican energy sector under the protection of more than 30 international treaties. Due to the size of the economic compensation that the Mexican government would need to pay those investors, such a win could easily turn into a massive loss for AMLO and Mexico.

Due to the increased legal uncertainty and political risk associated with these actions and an even stiffer regulatory paralysis enhanced by the COVID-19 pandemic, the pipeline of new private energy projects in Mexico has almost completely dried up in 2021. Private investors are now in survival mode and the only remaining developers and equipment providers are the ones competing to become EPC contractors for CFE or PEMEX.

Constitutional challenges 

AMLO has argued that “the companies who are benefiting from the onerous contracts awarded in previous administrations have lawyered up in order to preserve and continue the looting and theft, which is unacceptable,” and went so far as to say that “if the Supreme Court rules that the new energy legislation is inconsistent with the Constitution, [he] will change the Constitution.”

If AMLO wins this legal battle by way of the Supreme Court confirming his energy reform, or even by successfully amending the Constitution, investors’ confidence will be lost for a very long time and Mexico will be left with two state-owned monopolies that were already diagnosed by previous administrations with acute inefficiency and corruption, an illness that cannot be cured by decree or with good intentions. Both will need expensive treatments in order to survive and will not have the benefit of having private sector companies to share the load. On top of this, the price tag for this win, due to international arbitrations under investment protection treaties, will be unbearable for the country: at least ten to twenty times what was paid for the cancellation of the airport.

If AMLO loses this legal battle, the current impasse for the energy sector will probably drag on until the end of his administration through further regulatory amendments, regulatory paralysis and endless legal battles.

The near future looks quite grim in terms of private participation and investment in the Mexican energy sector. Private sector companies who have already invested in Mexico will need to spend the remainder of this administration fighting to ensure that their contracts, permits and authorisations are honoured and remain unaffected. Politicians who have aspirations to win the 2024 elections will need to spend time putting together an energy policy that attracts votes. If the current energy policy fails to deliver good results, it is quite likely that the next administration will need to move in a different direction, even if MORENA wins the next election.