Mexico President Andrés Manuel López Obrador last Friday sent a bill to congress to amend the Hydrocarbons Law and grant the state greater control over granting and revoking permits in the oil, gas and petrochemicals business.
López Obrador on Monday said the bill was designed to “remove the sharpest edges” of the 2013-2014 energy reform that opened the energy business to private industry, and it would protect citizens from “the voracity of some companies.”
The Mexican energy industry was quick to criticize the proposed changes, which come only weeks after a modification to the Electricity Law was approved by the senate.
Mexico fuel sellers trade group Onexpo Nacional said the bill contained “elements that contradict principles and rules established by the constitution over the participation of the private sector in the oil industry.”
There is particular concern over language in the bill that allows for confiscating permits based on a criteria of “imminent danger to national security, energy security and the national economy.” The bill states that in the event of a revocation, the government or relevant state company would assume responsibility for the operating permit.
López Obrador said all current contracts would be respected, “but we will no longer grant more if the law is approved, because we also need to protect” Petróleos Mexicanos, or Pemex, “to guarantee the supply of gasoline.”
Analysts at political risk group Eurasia said the criteria to rescind contracts “is very vague and raises concerns of expropriation risks.”
Congress is to begin analyzing the bill on April 7. Eurasia analysts expect the bill to pass before the June 6 midterm elections.
“Like with the electricity reform, the bill will face multiple legal challenges that could stop its implementation,” the Eurasia analysts said. “International arbitrations and pressure from the United States will be also an obstacle for the implementation of this bill.”
So far the electricity changes, which seek to give state utility Comisión Federal de Electricidad (CFE) priority in the power dispatch order, have been stalled by federal judges who have suspended implementing the new legislation.
Mexico energy expert David Goldwyn told NGI’s Mexico Gas Price Index that if López Obrador’s attempts to change the energy sector prove unsuccessful because of resistance in the courts, then the president would look to change the constitution after the midterm elections.
In order to change the constitution, the president would need a two-thirds majority in both houses of congress. The president’s Morena party has already secured this in the Senate, but the entire lower house is up for grabs in the midterm vote.
“The president has said if he fails on the legislative front, that he will — if he wins sufficient support in the midterm elections — try and constitutionally roll back the energy reform,” Goldwyn said. “So, there’s a high level of uncertainty there about what the president will be able to accomplish, and we won’t know until after the election.”
Mexico energy analyst Gonzalo Monroy told NGI’s Mexico GPI that there are elements to the fuel bill that will favor the industry, such as new laws around storage and harsher penalties for fuel theft.
However, he said, the ability to revoke permits on national security grounds, with the government or Pemex taking them over, is “worse than an expropriation, because at least with an expropriation, by law there is indemnification. Here there is no mention of payments.” The government had learned from the failure of the Electricity Law, “which was too blunt” in favoring CFE.
“National security is not as easy to shoot down. In this regard there is going to be a difficult battle ahead.”
Monroy added that the proposed changes, even though aimed specifically at boosting Pemex’s dwindling share in the fuels distribution segment, would impact all permits, including import, export, natural gas and liquefied natural gas permitting.
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