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PE Live: Safeguarding Mexican investment

The suspension of licensing rounds may have disappointed the private sector. But international treaties offer crucial protection against further unwinding of the country’s energy reforms

Mexico’s appetite for foreign investment has changed dramatically since the landmark energy reforms that began in late 2013. Bidding rounds opened the door to a wave of IOCs eager to participate in the country’s upstream, ending almost 80 years of state-controlled monopoly. But since the inauguration of President Andres Lopez Obrador in late 2018, operators have faced a very different government stance.

Licensing rounds, immediately frozen by Lopez Obrador, are still suspended and his administration remains critical of contracts previously signed with IOCs. Citing energy security concerns, the Lopez Obrador government has promised to maintain restrictions on future licensing rounds until operators significantly ramp up production from contracted blocks.

For concerned onlookers, unitisation discussions between Pemex and several IOCs are also critically important for foreign involvement in Mexico’s upstream. The national hydrocarbons commission is mediating disputes over operatorship and majority stakes in key offshore fields. Its decisions will likely have big implications for how aggressive the government could be in potentially rolling back Mexico’s reforms or even appropriating contracted fields.

Affording protection

But while foreign operators may feel uneasy about the government’s attitude towards the private sector, several ratified international treaties provide some important investor protection, according to a panel of experts on a PE Live webcast in early November.

“In my view, Mexico could not scale back the energy reforms in a manner which is consistent with its obligations under the USMCA” Rodriguez-Cortina, King & Spalding

In December 2018, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) trade agreement came into force, with Mexico the first of eight signatories. This year, the US-Mexico-Canada Agreement (USMCA) was also approved, replacing the existing North American Free Trade Agreement (Nafta). Mexico signed the multi-lateral treaty in April, and the agreement was fully ratified in July. The USMCA deal forms the second largest free-trade zone in the world after the EU, with the CPTPP in third place.

“In general terms, investors in the oil and gas industry continue to be protected today under investment treaties, the same way, or at least in a similar way, to which they were protected when the energy reforms were passed in late 2013,” explains Fernando Rodriguez-Cortina, senior associate at law firm King & Spalding.

“But the CPTPP maintains a more beneficial framework than the USMCA. The USCMA general framework of investment protection only includes protection against direct expropriation, excluding fair and equitable treatment and indirect expropriation, which are the standards more commonly invoked by investors,” says Rodriguez-Cortina.

He points out, however, that the oil and gas industry falls within an exception as a “covered industry” under the USMCA, meaning that, in addition to the general framework of investment protection under the agreement, the industry gets fair and equitable treatment and protection against indirect expropriation. Companies get the same protections afforded under the CPTPP, which is similar to Nafta but with certain limitations.

But to receive protection, investors and their affiliates, must be part of what the USMCA defines as a “covered government contract”. “Production sharing agreements, licences and other agreements with the National Hydrocarbon Commission, and other national authorities, would fall under this category,” says Rodriguez-Cortina.

Warning signs

One concern remains, though, that Mexico could yet amend its constitution to roll back the energy reforms. But Rodriguez-Cortina doubts the government would succeed even if there was enthusiasm to do so. “In my view, Mexico could not scale back the energy reforms in a manner which is consistent with its obligations under the USMCA,” he explains. “There has been some discussion as to whether Mexico is allowed under the USMCA to amend the constitution to repeal the energy reforms. Mexico would have the sovereign right to reform its constitution. However, they cannot make amendments in a way that would be inconsistent with their investment treaty obligations.”

A second point Rodriguez-Cortina highlights is that the CPTPP expressly mentions the energy reforms in one of its annexes. The conclusion is that Mexico will likely have difficulty making conditions more restrictive for investors while still bound to both treaties.

Rodriguez-Cortina does caution, however, that while the CPTPP and the USMCA treaties are likely to protect Mexico’s energy reforms for now, that does not mean the government’s stance will not impact existing and future investment decisions. “Investment treaties are great instruments that afford protection to investors, but they are certainly not insurance policies” he says. “Like in any dispute, there is no guarantee that you will prevail, and investors understand this. They have to weigh up all of the different factors to decide if they will continue to make new investments.”

The latest PE Live webcast, Harnessing opportunities laid down by Mexico’s energy reforms, in association with King & Spalding, is now available on demand.

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