Texas economy

USMCA energy consultations could hurt Mexico’s economy, expert lawyer says

Mexico must reach an agreement during the consultation period with its trading partners under the United States-Mexico-Canada Agreement (USMCA) in an energy policy dispute, said Teresa Gallegos, expert lawyer in the Mexican energy industry. NGI IPS from Mexico.

If not, “Mexico will be in a very unfavorable position which will undoubtedly have a negative impact on the national economy,” she said.

Gallegos, a seasoned senior legal counsel specializing in the energy and infrastructure industry, previously held the position of Head of Legal and Compliance for AINDA Energía & Infraestructura in Mexico City from 2018 to 2022. Previously, Gallegos was Head of Contracts oil and gas companies at the Mexican Ministry of Energy Sener from 2015 to 2017, where she developed the legal processes to determine the bidding rules for oil and gas tenders and concessions.

Gallegos was also responsible for oil and gas contracts at the Comisión Nacional de Hidrocarburos (CNH) from 2015 to 2017, where she was part of the inter-institutional working group with other government agencies that implemented the historic energy reform of the Mexico from 2013. She also previously worked as a legal coordinator at Sempra, a natural gas advisor at Petróleos Mexicanos (Pemex) and as a legal and regulatory manager at the Comisión Federal de Electricidad (CFE).

Gallegos holds a master’s degree in law from the University of Arizona with a specialization in international trade law, a degree in legal studies from the Universidad Panamericana and an undergraduate degree in law from the Tecnólogico de Monterrey.

EditorNote: NGIs Mexico Gas Price Index, a leader in tracking Mexican natural gas market reform, offers the following question and answer (Q&A) column as part of a series of regular interviews with Mexican natural gas market experts . Gallegos is the 85th expert to participate in the series.

NGI: What do you think of the consultations that the United States and Canada have requested to resolve energy disputes in the USMCA and what do you expect in the coming months?

Gallegos: The consultations requested by the United States and Canada regarding formal complaints filed under the USMCA relate to actions by the Mexican government that are seen as unfair treatment of their companies for the benefit of CFE and Pemex. This includes the 2021 reform of the Electricity Industry Act, the de facto blocking of a series of projects by private companies to operate in the energy sector, the practice of granting regulatory compliance extensions only to Pemex, and the action that gives Pemex and CFE a monopoly over the use of the natural gas transmission system.

The cautious US government, mindful of its political agenda and its willingness to cooperate with the Mexican government in areas such as migration and security, has unsuccessfully attempted to engage in dialogue with members of the Mexican government before the presentation of the consultations. Amid a lack of agreement and clear actions from the Mexican government, which created uncertainty for investors and failed to respect the Mexican legal framework that applies to part of the energy sector of the USMCA, the United States opted for consultations, joining Canada in trying to resolve the controversies.

The current Mexican administration is supported by a populist ideology that goes against the rule of law. President López Obrador, or AMLO, centers his speech on returning the country to the people and tries to use the nation’s history to explain how the country should defend itself against foreign interests. He does this by emphasizing that the public companies Pemex and CFE must stimulate national development. It promotes “national sovereignty” and calls those who oppose these policies “traitors to the nation”.

On September 16, National Independence Day, AMLO will use his pulpit to explain to the people the progress of the consultations with the United States and Canada regarding the USMCA. However, AMLO, along with other members of his cabinet, reiterated that the Mexican government had no intention of leaving the USMCA, nor of severing commercial relations with the United States, and acknowledged the importance of maintaining the pact for both countries, especially at a time when the Mexican currency has shown its strength against the dollar, supported mainly by the growth of exports and remittances.

NGI: How long do you think the consultation process will take?

Gallegos: Analysts predict that the resolution of the controversy could stretch until May 2023, given the stages of the process that are necessary before the issuance of the final report presented by a panel of specialists. This will be done before the start of the election periods in the United States and Mexico in 2024. AMLO may also use this political speech as a prelude to the election period.

The consequences of not reaching a short-term agreement are that AMLO will persist in its energy policy. If the panel releases its final report against the Mexican government for non-compliance with the USMCA, the United States and Canada will have the right to demand compensation or impose tariffs on key products Mexicans, which would place Mexico in a very unfavorable position which will undoubtedly have a negative impact on the national economy.

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Mexico attracts foreign direct investment due to the change in global trade known as nearshoring. However, Mexico could lose this opportunity. The loss of confidence and uncertainty generated by Mexican politics, not only in the energy sector but also in other sectors, discourages investment. The imposition of tariffs will mainly affect the manufacturing sector which, according to the National Institute of Statistics, INEGI, accounts for 87% of the country’s total exports.

NGI: There has been a lot of talk in the energy industry lately about Sener’s executive order issued in June that would require natural gas supply to be sold exclusively to “a state productive enterprise” like Pemex or CFE. What kind of impact do you think this regulation could have on the Mexican energy sector?

Gallegos: The Sener legal notification sent to the Comision Reguladora de Energía (CRE) and the operator Sistrangas Cenagas defines the strategy of the current administration aligned with the energy policy to “save” Pemex and CFE.

The strategy is based on establishing criteria for users or interested parties to receive natural gas transmission service at their Sistrangas receipt points. Users must credit receipt of supply to state producing companies, Pemex or CFE or their affiliates.

But the 2013-2014 energy reform is not a set of rules for private participation. This is a national strategy aimed at achieving efficient and competitive development of the gas and electricity markets. The separation of activities and free access allow competition between several agents, which favors the development of competitive and integrated energy markets.

If the current strategy proposed by Sener is followed and its criteria are applied, it makes open access conditional and discriminatory within the network of pipelines operated by Cenagas, which would artificially reinforce state enterprises and displace sellers, creating a monopoly for state enterprises. , which violates the constitution and current competition laws. This would deteriorate market supply conditions and therefore increase fuel prices, which would be passed on to end consumers.

NGI: Much of the rhetoric of the current administration has criticized foreign investment in the energy sector, although in recent weeks the government has awarded major contracts to the American New Fortress Energy Inc. and the Canadian TC Energy, for example. What do you think these contracts say about the government’s position on foreign investment in the sector?

Gallegos: The federal budget allocates resources mainly to the development of key projects in the current administration, which includes the Felipe Ángeles International Airport, AIFA, the Dos Bocas refinery and the Mayan train project. Consequently, CFE and Pemex do not have sufficient resources to carry out the energy infrastructure projects that Mexico needs to meet the demands of the population and guarantee energy security.

For this reason, Mexico needs investments from private energy companies in the sector and public companies have built strategic alliances with them. Considering the entire portfolio of investment projects proposed by private companies and the needs of the Mexican energy sector, it allowed CFE and Pemex to form these alliances to strengthen the energy policy of the current administration.

At the same time, the investment portfolio of TC Energy Corp. also includes the construction of the Tula-Villa de Reyes and Tuxpan-Tula pipelines, which since 2019 have been subject to international arbitration proceedings initiated by CFE. It was not until 2022 that CFE reached an agreement with TC Energy and, in exchange for the cancellation of the arbitrations, signed an agreement to solve the social problems and continue the construction of the pipelines.

Thus, the Southeast Gateway pipeline is under construction and will transport natural gas to the southeast of the country, a region where the transport of natural gas has been complicated by the lack of infrastructure, as well as provide a solution to power outages. constant electricity and high energy prices.

In addition to these infrastructure projects, in the previous administration, CFE awarded TC Energy other gas pipeline projects to meet strategic demand for natural gas for electric power generation, including the Southern Marine Pipeline from Texas to Tuxpan which connects to the Dos Bocas refinery, which was awarded to TC Energy and IEnova in the context of a public tender in 2016. At the same time, CFE plans to consolidate the five natural gas transport contracts into one and to obtain a 15% stake in the company TGNH, a company of TC energy company, and increase its stake to 45% in the south-east extension project from 2025.

New Fortress has entered into strategic alliances with Pemex as well as with CFE to develop natural gas energy infrastructure projects. In alliance with Pemex, New Fortress will develop a project to supply natural gas to the onshore national market in Mexico and invest in the further development of the Lakach field, a deepwater offshore area operated by Pemex to delegate a Fast LNG project to liquefy a large part of the natural gas produced on the ground to export it to the world market.

Together with CFE, New Fortress will make an investment to develop and expand natural gas supply to several CFE power generation facilities in Baja California Sur. There it will sell to the CFE La Paz energy plant and create a new offshore LNG center on the coast at Altamira in Tamaulipas, where CFE will supply gas to two New Fortress Energy Fast LNG units, using the existing capacity of the existing pipeline of CFE. .