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Former U.S. Officials warned of ‘Significant Uncertainty’ in Mexico Energy Sector

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According to a letter signed last week by former U.S. officials, recent government directives that favor state-owned companies create “significant uncertainty” in Mexico’s energy sector

Furthermore, these directives could potentially violate Mexico’s obligations as outlined in the United States-Mexico-Canada-Agreement, or USMCA, former officials said.

Possibly of your interest: Could the USMCA protect your energy investment?

Former Officials on Mexico’s energy market: “significant uncertainty”

Last week, former Trump administration’s officials, including U.S. Secretary of State Michael Pompeo, Energy Secretary Dan Brouillette, and Commerce Secretary Wilbur Ross, signed a letter indicating that recent government directives in Mexico favoring state-owned companies create “significant uncertainty” in its energy sector.

“In addition to harming several U.S.-backed private sector projects across the energy sector, these measures could adversely affect hundreds of millions of dollars of U.S. government public energy investments in Mexico made through the U.S. International Development Finance Corp., the Export-Import Bank of the United States, and the U.S. and Mexican public investments via the North American Development Bank,” the letter said.

In this regard, in June 2020, Mike Sommers, President of the American Petroleum Institute (API), warned several U.S. officials of regulatory moves in the Mexican energy sector that were “inconstantly applied or inconsistent with past practice.”

According to Sommers’ warning, since President Andrés Manuel López Obrador took office in December 2018, Mexico’s energy sector has seen several budget cuts, layoffs, and senior officials’ resignations.

Perceptions

Montserrat Ramiro, commissioner for the Energy Regulatory Commission (Comisión Reguladora de Energia or CRE by its Spanish acronym) from 2015-2019, resigned amid the changes implemented by the current administration.

In an interview with NGI’s Mexico GPI, Ramiro suggested that the Mexican president is following through with his campaign promises.

“This administration has an objective, whether or not we understand it as rational, to strengthen the state-owned companies in a way that is neither financial nor operational,” the former regulator said. “What they truly think is that the market shouldn’t exist, that the energy sector shouldn’t be open to competition, and that the state companies should be the sole providers of service.”

Last July, López Obrador sent a memorandum to energy regulators specifically asking them to strengthen the state-owned firms Petróleos Mexicanos (Pemex) and Comisión Federal de Electricidad (CFE).

Uncertainty in Mexico’s energy sector: a trend since the last 2 years

This trend has been increasingly followed by restrictive rules on import and export permits for hydrocarbons; and a plan to eliminate the Comisión Federal de Competencia Económica (Cofece) and transform it into existing ministries.

According to an analysis provided by NGI, Cofece has proven to be one of the few effective counterweights against López Obrador’s more controversial energy policies.

U.S. former officials’ letter “could have been sent a year ago, because nothing has really changed between a year ago and now,” Ramiro said. “The problem is that I think everybody, including some people from the U.S. policy side; thought that the economic rationality of closing the energy sector wasn’t a real possibility. What this letter proves is that, finally, and maybe a day late and a dollar short; they realize that the current policy doesn’t think in terms of economic rationality.”

Outlooks from the private sector

Cesar Cadena, president of the Energy Cluster of Nuevo León trade group; noted in an interview that the new permitting rules on hydrocarbons’ imports and exports are shutting off Mexican companies from the market. In his perspective, Pemex and U.S. firms that have already secured long-term permits are currently the only players.

“Legally, there is very little we can do,” he said at the virtual 6th Mexico Infrastructure Projects Forum on Tuesday. He said decisions on permits in the energy sector now rest with Energy Ministry Sener; and it bases its reasoning on notions of energy sovereignty and “energy balance,” said Cadena.

The coronavirus pandemic has made permitting in the energy sector slower, with Sener closed since March. Earlier this week, CRE also said it was suspending activities because of the coronavirus’s health risks.

“Legal appeals take time,” Cadena said. However, “before, if you asked for a permit, and the response time was slow, it was automatically given. Now, if the authority doesn’t respond to you, it’s automatically a no.”

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