The American Petroleum Institute (API) on Friday told the Biden administration that unfair treatment of U.S. energy companies by Mexico’s government is worsening and is likely in violation of the U.S.-Mexico-Canada-Agreement (USMCA). 

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In a letter to cabinet officials, API CEO Mike Sommers alleged an intensifying pattern of nationalist regulatory and legislative reforms under Mexico’s firebrand president Andrés Manuel López Obrador. The rule changes are designed to give national oil company Petróleos Mexicanos (Pemex) and state power utility Comisión Federal de Electricidad (CFE) unfair advantages over non-state competitors, Sommers said.

The oil and gas lobbying group had previously warned the Trump administration in June 2020 about López Obrador’s energy policies, which have drawn criticism from the fossil and renewable energy industries alike, as well as numerous injunctions by the Mexican courts.

In the latest letter, Sommers highlighted the increasingly intertwined nature of the North American energy markets. 

The USMCA, which replaced the North American Free Trade Agreement (NAFTA), maintains NAFTA’s chapter 11 investor-state dispute (ISDS) mechanism for select industries including oil and gas. The agreement also enshrines the duty-free flow of electrons and molecules between the United States, Mexico and Canada.

“Unfortunately, we have seen continued efforts by Mexican President Andrés Manuel López Obrador’s administration to undermine [USMCA] and discriminate against U.S. investors in violation of commitments made by Mexico in both NAFTA and USMCA,” Sommers said. 

Since API’s previous warning, López Obrador “has increased such actions – in both scope and severity – to change the fundamentals of the energy sector in Mexico,” Sommers said.

López Obrador, commonly referred to by his initials AMLO, “has spearheaded major amendments to two laws — the Power Industry Law and the Hydrocarbons Law — to change market rules in favor of [Pemex and CFE] and against private companies,” Sommers said. “The common denominator of both laws is to hinder new private investment in the energy sector as well as destroy the value of already operating private assets in violation of Mexico’s commitments under both NAFTA and USMCA.”

The Power Industry Law reform puts CFE power plants at the top of the dispatch order instead of less costly and less polluting private units, API said.

The organization also said that Pemex “has an oversupply of fuel oil, which the government plans to use at CFE’s power plants, since they have not been able to sell it in international markets.”

Citing estimates from environmental groups, API said that enactment of the law, which has been halted by the Mexican courts, would result in a 15-20% increase in carbon dioxide emissions and a 150% increase in sulfur dioxide emissions.

A federal judge on Friday also granted a provisional suspension of the hydrocarbons law, pending an underlying lawsuit against it filed by five companies that hold permits in a regulated segment of the hydrocarbons sector.

Wood Mackenzie’s Ricardo Falcón, senior gas analyst for Mexico, warned in a recent interview with NGI’s Mexico GPI that changes to the Hydrocarbons Law could impact the natural gas segment as well as liquid fuels, “from exploration and production to midstream to downstream operations.” 

‘Increasing Difficulties’

The Hydrocarbons Law reform grants “discretionary powers to the government to suspend or revoke permits across the fuels value chain and institutes retroactive and compulsory storage obligations…generating legal uncertainty affecting long term investment projects,” API said. 

The storage obligations require companies in the liquid fuels market to have a minimum of five days’ storage capacity. The problem, API said, is that companies have been unable to develop storage projects “due to unjustified delays in granting the required permits by government authorities.

“Additionally, state-owned Pemex owns and operates most of the certified storage capacity and has not been willing to yield storage space through the ticketing market and open seasons.”

In addition to the storage obligations, the Mexican government has eliminated 20-year import/export permits for hydrocarbons, allowing U.S. investors to apply for only one-year, or in some cases five-year, permits, API said. Authorities also have increased the types of products that require these permits, and changed the procedures and requirements for obtaining them, API said, adding, “These actions severely hinder efforts by U.S. companies to build out retail networks.”

U.S. companies engaged in retail marketing of gasoline and diesel in Mexico “are facing increasing difficulties in getting permitting approval for all processes and activities related to gasoline and diesel retail stations,” API said. 

Mexico’s Comisión Reguladora de Energía (CRE), or energy regulatory commission, “prolongs administrative processes for permits to transfer legal ownership that are by regulation required to be granted within 90 days.

“Moreover, CRE also requests additional information to issue the permits that is not required in the regulations, until the point of denying such permits to the companies, after several delays.”

API added that Mexico’s Consumer Protection Bureau PROFECO “has been shutting down pumps at U.S. enterprise gas stations for minor or non-existent infractions,” and that Pemex receives waivers for regulatory requirements such as low sulfur diesel and summer gasoline vapor pressure limits, while non-state actors must be in strict compliance.

Sommers said, “These targeted actions against API member companies likely contravene Mexico’s USMCA commitments to accord non-discriminatory treatment with respect to the trade in goods (Article 2.3), investment (Article 14.4), and the sales and purchases of state-owned enterprises and designated monopolies (Article 22.4). 

“These actions also appear to violate additional rules related to investment, including the minimum standard of treatment (Article 14.6), and they could also result in unlawful indirect expropriations (Article 14.10).” 

Sommers’ letter was addressed to Secretary of State Antony Blinken, Secretary of Energy Jennifer Granholm, Secretary of Commerce Gina Raimondo and U.S. Trade Representative Katherine Tai.

“We encourage you to continue engaging diplomatically with President López Obrador and your cabinet-level counterparts in Mexico’s agencies to urge the government of Mexico to uphold its USMCA commitments to treat U.S. investors and U.S. exporters fairly,” Sommers told the officials. “Additionally, we ask that you include these violations as a top discussion item for the upcoming Free Trade Commission meeting that Ambassador Tai and Mexican Secretary of Economy Tatiana Clouthier agreed to when they spoke in March.”

Sommers added, “USMCA was negotiated to strengthen the trading partnership between the U.S., Mexico and Canada by creating a positive environment for trade, investment and operations for all parties involved, bringing immense benefits to energy consumers in the United States and Mexico.

“Moreover, a stronger regional collaboration on energy is critical for boosting economic growth, continuing to create jobs in the three countries, and consolidating North America’s global competitiveness.”