Report: New North American trade deal limits changes to Mexico’s energy policies

Under the United States-Mexico-Canada Agreement (USMCA), Mexican President Andrés Manuel López Obrador would not be able to roll back the 2013 reforms to the country’s energy law permitting foreign investment in the industry, according to a report from the Center for the United States and Mexico at Rice’s Baker Institute for Public Policy.

Credit: 123RF.com/Rice University

López Obrador, who assumed office Dec. 1, 2018, distrusts the energy overhaul, said David Gantz, the Will Clayton Fellow in Trade and International Economics at the Baker Institute.

Gantz’s paper, “The United States-Mexico-Canada Agreement: Energy Production and Policies,” focuses on challenges posed by the energy reforms undertaken by the previous administration of Enrique Peña Nieto; the limitations the USMCA imposes on changes to Mexico’s energy policies, such as restricting investment in the sector; other USMCA provisions that could affect energy; and a critique of López Obrador’s early energy-related policy decisions.

The report also includes a summary of changes in the legal treatment of U.S.-Canada energy relations under the USMCA compared to Chapter 6 of the North American Free Trade Agreement (NAFTA).

The successor to NAFTA, the USMCA has been signed but not yet ratified by the three countries.

Energy is one of Mexico’s largest exports, ranking behind only motor vehicles and machinery in dollar terms. However, production has steadily decreased in recent years, from an average of about 3.4 million barrels per day in the early 2000s to about 1.7 million barrels per day by November 2018, according to the report. Foreign and other private investment in the energy sector was restricted to the Mexican state until 2013-14. Then, with a series of more than 21 legislative changes and three amendments to Mexico’s constitution, led by the Peña Nieto administration, the reforms were intended in significant part to support the enactment of financial, education, telecommunications and fiscal reforms.

“The success of the López Obrador presidency may well depend on his energy policies, including his treatment of the bloated, inefficient state-owned oil company, Pemex, and the ability to continue to attract foreign investment in the hydrocarbons sector,” wrote Gantz, who is also the Samuel M. Fegtly Professor of Law at the University of Arizona’s James E. Rogers College of Law and director emeritus of its international trade and business law program.

“Because energy exports are a major source of foreign exchange for Mexico, maintaining and increasing energy export earnings are critical to generating the revenues López Obrador will require to carry out many of his domestic reforms, including those designed to improve the lives of Mexico’s poor,” Gantz wrote.

Gantz notes Mexico did not take any specific reservations in its USMCA obligations that would affect investment in the energy sector beyond the stating-the-obvious language in Chapter 8. However, Mexico agrees in the USMCA to a type of “most favored nation” clause, agreeing to afford other parties as well as service providers and state-owned enterprises treatment regarding energy that is no more restrictive than treatment Mexico grants to parties of other trade agreements Mexico has entered, Gantz said.

This is a clear reference to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which was signed by Mexico in March 2018 and went into force for Mexico and six of the 10 other CPTPP parties on Dec. 30, 2018, Gantz said. In the CPTPP, Mexico listed several specific energy-related reservations. Those reservations permit foreign investment in the sector under the conditions set out in the 2013 legislation enacted by the Peña Nieto administration, barring any less favorable treatment.

“Thus … incorporating the energy reservations agreed to by Mexico in the CPTPP, the López Obrador administration (and any subsequent Mexican governments) may not make the rules under which foreign investment is permitted in the energy sector any more restrictive than those set out in the CPTPP annexes,” Gantz wrote.

“The Peña Nieto-era energy reforms offer the López Obrador administration an opportunity to lay the groundwork for an increase in Mexico’s hydrocarbons production in the future, even if the current decline in the country’s production and exports probably could not be fully remedied between now and 2024, when López Obrador’s term ends,” Gantz wrote.

He concluded, “The USMCA may also help preserve foreign investor confidence by making the traditional investor-state dispute protections available in the event of hydrocarbons-related disputes with the Mexican government or Pemex. However, there is no assurance that wise energy policies will be pursued. Early actions by the administration — particularly López Obrador’s strong support for Pemex, tasking Pemex to construct a new oil refinery and a moratorium on further lease auctions — are more than sufficient to raise questions as to whether current policies will stem or increase production declines.”