Legal, economic constraints to help Mexico-US energy relations reset

• Outgoing US officials send Mexico letter on energy policy
• Biden approach to Mexico expected to be institutionalised
• Energy sector participants can still benefit from filing claims – attorney

HOUSTON (ICIS)–The Mexican energy market will continue to face uncertainty this year, but market participants can prepare for a recalibration between it and its largest trading partner that may prove fruitful for both.

Some investors are hoping Mexico’s administration will soon publish a promised public-private infrastructure plan that might include energy projects while others continue legal battles to protect existing investments.

Both types of investors can stand to benefit from a recalibration in Mexico-US relations as the incoming US Biden administration begins to implement what many expect will be a more institutionalised approach toward the administration of Mexican president Andres Manuel Lopez Obrador (AMLO).

The outgoing US secretaries of state, energy and commerce seem to have put Mexico’s administration on notice in an 11 January letter addressed to their counterparts in Mexico.

In the letter reviewed by ICIS, the secretaries express concern about AMLO’s controversial 2020 memo and policies that “allegedly instructed [Mexican energy regulators] to block permits for private sector energy projects and to exercise their regulatory authority to favour state-owned energy companies”.

The letter goes on to signal other concerns and the secretaries “insist that Mexico lives up to its USMCA obligations”.

TRANSITION

Mexico-focused energy attorneys said the letter does not indicate a coming showdown but an opportunity for dialogue.

Jose Maria Lujambio, partner and energy practice director at Cacheaux, Cavazos and Newton and former counsel for energy regulator CRE, said that although US president-elect Biden has not yet identified a replacement for the US ambassador to Mexico, the presence of seasoned Mexico expert Roberta Jacobson in the administration is promising.

Jacobson was listed as of 19 January on the Biden transition website as a volunteer for the US Department of State agency review team. Given her experience, she is likely to be tapped for greater responsibility.

Lujambio said Biden’s approach to Mexico is likely to be less personalistic than Donald Trump’s and more active through institutional mechanisms.

Dino Barajas, an energy attorney and partner at DLA Piper focused on Latin American infrastructure project financing said he sees a reset coming between the two countries, incentivised by their interdependence.

“This is an opportunity for both sides to cool the rhetoric,” he said.

INTERESTS AT STAKE

The letter outlines potential harm to US government public energy investments in Mexico made through major financial institutions, meaning that US interest in Mexico energy is likely to be long term.

In addition to pointing out energy investments made through the US International Development Finance Corporation and the Export-Import Bank of the US, the letter highlights joint Mexican and US public investments made through the North American Development Bank.

The investments, in addition to substantial trade, cement the countries’ interdependency and likelihood of cooperating.

AMLO said in a 14 January press conference that his administration was working on revising the structure of autonomous entities including energy regulators, although he separated some unidentified entities associated with trade agreements.

When asked if he would keep those required for trade, he said it “depended on interpretation”.

The head of energy ministry at SENER said in a 15 January social media post that Mexico’s relationship with the US regarding energy respected each country’s constitution.

Lujambio said Mexico’s constitution includes acknowledgment of its obligation to abide by international treaties it signs like the USMCA.

The attorney also pointed out the USMCA chapter requiring each of the three countries avoid giving state-owned companies unfair advantages.

Federal judges have signalled through unfavourable injunction rulings that SENER has violated Mexico’s constitution through some of its controversial energy policies, according to Lujambio.

OUTLOOK

Barajas said his firm is advising clients to present legal claims under NAFTA and USMCA to protect investments because waiting to do so could complicate the process and amount of damages they can recover.

The attorney said it will also be important to see how the financial entities mentioned in the letter respond to energy policies and how the market responds to coming energy infrastructure tenders.

“Don’t disregard warnings on the reverse energy reform but examine the motivation behind the rhetoric and look at the fundamentals. AMLO needs a strong economy but it will have to be on his terms,” Barajas said.

AMLO’s response during his 14 January conference could be an attempt to appear strong in the face of legal parameters that, if violated, may hobble Mexico’s highly-interconnected economy.

Mexico’s vaccine distribution has hit obstacles and its economic recovery is expected to be among the slowest in the region.

AMLO cannot afford more setbacks ahead of June elections and faces difficult tradeoffs between implementing rhetoric and punishing economic and legal constraints.