Mexico's Hydrocarbons Law: What Foreign Investors in Mexico Must Know to Protect Their Rights
On March 26, 2021, Mexico President López Obrador sent a bill to Congress to modify the country's hydrocarbons law (the "Draft Bill").
Under the Draft Bill, (i) the granting of import, commercialization, and distribution permits for all hydrocarbons would be subject to storage capacity level determined by the Mexican government; (ii) suspension and termination of permits would be enabled under national security concerns; (iii) state-owned Pemex would be the only entity allowed to continue operations of any projects with suspended permits; (iv) existing import, commercialization, and distribution permits will be reviewed, and terminated, if they do not meet the required storage capacity; and (v) the Mexican government would have ample discretion to review and cancel permits.
How Is the Draft Bill Significant?
The Draft Bill is a new episode of the López Obrador administration's attempts to dismantle Mexico's 2013 energy reforms. It changes the rules of the hydrocarbons market to favor the state-owned Pemex, increases regulatory uncertainty, and deals a major blow to private investment in the oil and gas sector. If approved along the lines of the Draft Bill, it would be a material modification of the sector rules that were intended to attract national and foreign investment in the hydrocarbons sector.
What Foreign Investors in Mexico Need to Know
Several provisions of the Draft Bill may violate the Mexican Constitution and, if approved, could be challenged in Mexican courts. The Draft Bill content would also potentially violate rights afforded by Mexico to foreign investors under more than 40 bilateral investment treaties, fair trade agreements, and international treaties containing investment chapters. Accordingly, when considering legal options to address a potential change of the hydrocarbons law, qualified foreign investors in the Mexican oil and gas industry can consider a two-pronged approach: domestic and international, along the lines we recently discussed in connection with the electricity reform.
It will be a challenge to address these issues and successfully navigate the complex options to protect investments in the oil and gas sector in Mexico. Our presence in Mexico, in the United States, and in all relevant European jurisdictions―as well as our unparalleled experience in the energy markets and in the litigation and arbitration space on both sides of the border, including specifically in connection with investment and investor protection related disputes―allows us to help in dealing with the multifaceted challenges that the reform of the hydrocarbons law involves. Our cross-border, fully bilingual, multidisciplinary team is ready to deliver comprehensive legal advice on the options in defense of the rule of law.