Miriam Grunstein, Ph.D.
Nonresident Scholar, Center for the United States and Mexico
The legislative changes to the hydrocarbon law approved by the Chamber of Deputies of the Mexican Congress on April 14, 2021, bring to mind two dates, one historic and one fictional. The first is the year Mexico expropriated its hydrocarbons industry: 1938. The second is “1984,” George Orwell’s novel about a world where government surveillance is ubiquitous. Both instances are expressions of state power through legal reform and both are exceptionally alarming. Here is why.
The 2021 changes to the Hydrocarbons Law refer primarily to hydrocarbon products’ transportation and storage. But there are three problems with this law. First, the usefulness of the changes is questionable. Some of the proposed changes are already possible under administrative procedures, such as the permitting and contracting processes for such services. Enshrining them into law can only be seen as ensuring that they cannot be easily changed when and if there is a change in leadership in the regulatory agencies, such as the Federal Energy Commission (CRE) or the Department of Energy (SENER).
Second, the law is unnecessarily strict in terms of the requirements for the provision of these services and is especially severe if companies incur violations of the law. For example, the process already in place allows CRE or SENER to suspend or revoke transportation or storage permits for inadequate delivery of services.
Third, the new law also allows for “the occupation and seizure” of facilities for reasons as broad as national security and public policy. Mexico’s state oil company, Pemex, may occupy the facilities. However, there does not seem to be a statute of limitations for “occupation and seizure.” Moreover, there is the question of what happens to payments derived from the contracts. Storage and transport rates are generally twofold: there is a fixed capacity rate and a variable use rate. Generally, capacity rates are paid by the consumer regardless of actual use of the facility. But what would happen to the payments while the infrastructure is “occupied?” It could be assumed that Pemex, the occupier, will receive the payment, which would amount to expropriation, but without the remedy provided by the Constitution under eminent domain rules.
This is why Mexico’s expropriation of its hydrocarbons industry in 1938 comes to mind.
As for Orwell’s “1984,” the law could make a company to feel “Big Brother” is watching — and going beyond reasonable supervision to ensure compliance. For example, the new law dictates that storage facilities should have sufficient capacity. But it does not define the scope, breadth and meaning of the word “sufficient.” For what market or region should that capacity be sufficient? Further, who decides how much is sufficient? Sufficient is often a purely business decision that concerns the investor, and one can infer that a competent authority will be empowered to ask for sufficiency and grant or deny a permit based on these criteria. But without a definition, such permits can be denied arbitrarily. Moreover, the government on various occasions has expressed the need for “energy security,” imposing a political rather than market-based determination of how many storage tanks is needed. Moreover, Pemex would be the primary user, as dominant importer and trader and could arbitrarily use the law to push out competitors. That is, storage facilities would then be at risk of occupation by the same, should “national security” be decreed.
Finally, the new law also requires that the owner of the facilities guarantees the lawful origin of the hydrocarbons it transports and stores. The question is, what proof of is required. Contracts by companies with sellers and traders could be shown to the government but this could, in the best of cases, intrude on the rights of companies. An arbitrary request of information could unjustifiably require a company to reveal its commercial strategies.
This is where the novel “1984” comes to mind.
To conclude, what motivates the passage of an unnecessary and intrusive law? While the approval of the proposed law is still pending in the Senate, it is likely that it will pass and enter into force before the elections of June 2021. It is likely that these changes have political motivations: to show the still numerous, nationalist voters supporting MORENA (the president’s party) that, as did General Lazaro Cardenas in 1938, the president may intervene, police and even occupy and seize private property because he has the votes in Congress and the will to do it. Consequently, when disputes arise, current projects will end up in the courts, and future projects will likely be cancelled or stalled until Mexico regains its credibility as an amicable host for investment.