March 31, 2021

Mexico to Discuss Oil and Gas Reform Bill

Holland & Knight Alert
Carlos Ochoa | Aldo González

On March 26, 2021, Mexico's president submitted to the Chamber of Representatives (Cámara de Diputados) a bill to reform the Hydrocarbons Law (Ley de Hidrocarburos or LH) (the LH Reform) that favors the state-owned company, Petróleos Mexicanos (Pemex). The LH Reform will follow the standard course of discussion and approval. As such, it will be discussed in the Chamber of Representatives, and then, if approved, it will be passed to the Mexican Senate for discussion and approval. If approved, the president shall enact it through Mexico's Official Federal Gazette (Diario Oficial de la Federación).

Key Changes to the Oil and Gas Industry

The LH Reform seeks to strengthen state-owned energy companies (i.e., Pemex and Comisión Federal de Electricidad or CFE) by reorganizing the industry, "disincentivizing" fuel theft, and securing the supply of hydrocarbons and oil products. While the LH Reform stresses its applicability to fuels, some provisions could also be applied to the oil and gas sector. The key changes are outlined below.

Policy for Minimum Storage Volumes for Oil Products

In general, the LH Reform pretends to reinforce the government's storage policy (Política Pública de Almacenamiento Mínimo de Petrolíferos) (as amended on Dec. 6, 2019, the Storage Policy) and establish some of its provisions in the LH. This Storage Policy sets minimum storage periods of five days for gas and diesel, 1.5 days for jet fuel in airports and 1.5 additional days as the national average.

Under the LH Reform, the Ministry of Energy (Secretaría de Energía or SENER) will have the authority to set a minimum storage volume to obtain approvals and permits by the Energy Regulatory Commission (Comisión Reguladora de Energía or CRE).

Automatic Denial for Assignment of Permits (Negativa ficta)

If the SENER or CRE does not resolve an assignment request within LH's timeframe, the LH Reform proposes an automatic denial mechanism that will automatically deny such request. The bill's background rationale states that this rule also may apply to the initial request for permits.

Revocation of Permits in Case of Recidivism

LH Reform proposes revocation of permits in case of recidivism of 1) breaching provisions related to quantity, quality, and measures of hydrocarbons and oil products, and 2) modification of technical conditions of systems, ducts, facilities or equipment without the corresponding authorization. Also, LH reform includes fuel smuggling as the cause of revocation.

Suspension of Permits Due to National Security, Energy Security or National Economy

The Mexican government expects that Pemex plays a more active role in oil and gas industry activities. The LH Reform contains provisions to protect "national security, energy security, or national economy" that would affect the rights and assets of permit holders and private participants.

LH Reform states that the authorities may suspend permits upon the occurrence of events that would warrant the protection of the "national security, energy security, or national economy." In such an event, the authority that issued the permit would be allowed to take over the administration and operation of the permit-holder to "guarantee the interest of final users and consumers," and would enjoy discretion in decisions such as maintaining the facility's personnel, hiring a new operator or both. State-owned entities may be contracted to take over a facility's operation without the need for technical capacity. Such suspension would last until evidence is found that the security or economic causes that authorized such suspension had come to an end, except when the suspension was triggered by illegal commercialization or alteration of fuel.

Ex-Officio Termination of Permits

The transitory provisions of the LH Reform include two orders addressed to energy authorities 1) to revoke permits that do not comply with the storage volume requirements set forth in the Storage Policy and 2) to "deprive of legal effects" all permits that have expired.

Moreover, these provisions include a general statement that all permit obligations that have not been fully satisfied by their permit-holders shall be revoked "upon the entry into force" of the LH Reform.

Legal Remedies and Upcoming Litigation

Amparo and Other Constitutional Challenges

Assuming that LH Reform is approved in terms substantially similar to the bill, there could be constitutional grounds for challenging by private and public parties, such as:

  • amparo actions before district courts (juzgados de distrito) filed by private individuals and other interested parties who are directly or indirectly affected by the LH Reform
  • unconstitutionality actions (acción de inconstitucionalidad) filed before the Mexican Supreme Court of Justice (Suprema Corte de Justicia de la Nación or SCJN) by a group of legislators representing more than 33 percent of the any the Chamber of Deputies or the Senate
  • constitutional disputes (controversia de inconstitucionalidad), another constitutional instance where government bodies may challenge new laws before the SCJN (e.g., the Federal Antitrust Commission — Comisión Federal de Competencia Económica or COFECE)

International Claims

Investors could request a consultation and subsequent investment arbitration proceedings against Mexico under international investment treaties applicable to the LH Reform. While each treaty has its own jurisdictional and eligibility criteria, claims of this sort are typically filed alleging violations to national treatment, most favored nation and expropriation-effect grounds.

These cases are typically presented based on complex factual backgrounds that are usually not documented with a single state action, for example, within the LH Reform alone, but a series of events and actions that support a specific violation under the applicable treaties. Some treaties require that local remedies or legal challenges be dropped prior to commencing arbitration proceedings; this is determined on a case-by-case basis and depending on each treaty's particular features.

Pemex Amparo on Storage Policy

Based on publicly available information, Pemex filed an amparo lawsuit against the Storage Policy on July 6, 2020, to prevent the disclosure of its storage capacity, which is being carried out by federal courts. The definite suspension was denied and is in the process of being resolved.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.

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