A U.S.-Mexico-Canada dispute launched last month by the U.S. over Mexico’s energy policies overlooks key policies pushed by the Mexican president that threaten foreign investment in upstream oil production, a longtime observer of Mexico’s energy industry contends in a new report.
“There is a green bias in the USTR’s list of complaints, or so an informed reader would infer by the lack of any reference by USTR to notorious policy and regulatory malpractice in the upstream,” energy consultant George Baker writes in an Aug. 9 Mexico Energy Intelligence report about the Office of the U.S. Trade Representative’s July 20 request for consultations. Canada announced on July 21 it was launching its own dispute against Mexico under USMCA, while supporting the U.S. in its challenge.
Baker, who has been publishing the industry newsletter MEI since 1995, faults USTR in particular for not addressing what he calls Mexico’s “mistreatment” of Houston-based company Talos Energy and its partners. The company last September filed a notice of dispute with Mexico under USMCA over the country’s decision to grant authority over the Zama reservoir -- a major oil field discovered in 2017 by Talos and its partners -- to state-owned energy company Pemex.
USTR’s request expresses “nary a whisper of concern” about “the black-oil scandal of the regulatory nationalization of the huge Zama reservoir,” Baker writes.
The U.S.’ request does raise some concerns about Pemex -- in particular, about a five-year extension granted in 2019 to the state-owned company, and not to other companies, to comply with new sulfur content requirements. According to the request, the extension appears to breach Mexico’s commitments under USMCA to accord national treatment to U.S. goods, among other possible violations.
USTR also raises concerns about a 2021 amendment to Mexico’s Electric Power Industry Law that prioritizes state-run electricity plants over cleaner, privately run alternatives, as well as “delays, denials, and revocations of U.S. companies’ abilities to operate in Mexico’s energy sector” and actions taken by the Mexican government regarding the use of Mexico’s natural gas transportation service, as described in the request.
According to Baker, though, USTR’s “silence” on Mexico’s takeover of the Zama oil field “will likely be interpreted by Mexican authorities as a green light for Pemex to more of the same.”
Mexican President Andrés Manuel López Obrador “knows that the Zama reservoir holds the potential for tens of billions of dollars in royalties for the Mexican State -- plus billions in profits to the partners,” Baker writes.
Soon after discovering the new field, Talos learned it extended into territory owned by Pemex. Following an independent study that determined Pemex controlled just over 50 percent of the field -- an assessment Talos has contested -- the Mexican government last year declared the heavily indebted state-owned company to be Zama’s “operator.” Talos has led a $350 million investment in the new field; Pemex, which has yet to invest in Zama, told Reuters last month it will do so if Talos accepts an agreement that Pemex will run the project.
Talos Chief Executive Officer Timothy Duncan told Bloomberg last week the company was “willing to move forward and not continue to fight over operatorship as long as it has a leading role.”
Duncan said he hoped to reach an agreement with Pemex by next March -- and, failing that, said Talos likely would seek compensation under USMCA.
Baker, however, suggests that such a dispute could be difficult for the U.S. company to win -- pointing to similarities between the case and an investor-state dispute involving claims of expropriation filed under the North American Free Trade Agreement by a U.S. waste-disposal company, Metalclad, against the Mexican government in 1996.
In the NAFTA case, a panel awarded Metalclad $16.7 million for damages in compensation for lost investment after the Mexican government, citing environmental concerns, declared industrial activity was prohibited on territory owned by the company.
Environmental groups decried the sum granted to Metalclad as an undeserved gift, but Baker contends the government’s declaration was unjustified and that the award fell far short of making up for the company’s diminished investment.
López Obrador “is confident that Mexico would never be the losing party in investor-dispute litigation. He seems to have history on his side,” Baker writes.
He contends that USTR’s reticence about Talos signals the U.S.’ “fear of escalation.”
The Mexican president “would be right to predict that such fear will undermine the force of complaints about midstream and downstream issues. It follows that there is little on his side to fear from green virtue-signaling by climate-obsessed American functionaries,” Baker contends.
López Obrador has pushed a series of policies to undo reforms that opened the country’s energy sector beginning in 2013, boosting government control over the sector in an effort to ensure what he has described as the country’s “energy sovereignty.”
According to Baker, Mexico likely will rely on that premise as part of its defense in the USMCA dispute -- and will insist the energy reforms from the last decade “did not restrict Mexican sovereignty, allowing the government to take appropriate measures to assure energy security,” he writes.
He contends the U.S. dispute will go nowhere.
By the time the arbitrators come to a finding of fault, and by the time USTR devises a plan to ‘suspend trade benefits’ equivalent to the damages suffered by American midstream and downstream and power investors," López Obrador will be long out of office and U.S. investors already will have "lost their shirts," he writes.
USTR did not respond to a request for comment by press time.
Mexico’s chief trade negotiator for USMCA, Kenneth Smith Ramos, has suggested that neither side was likely to readily back down from its position in the dispute.
A spokesman for Talos told Inside U.S. Trade on Tuesday there was “no change” in its position as laid out in the notice of intent filed under USMCA, and that negotiations were ongoing.
The American Petroleum Institute, the major U.S. trade association for the oil and gas industry, welcomed USTR’s request last month. In a joint statement issued on July 20 with American Clean Power, a federation of renewable energy companies, the fossil fuel group said the request “represents a significant step forward in addressing Mexico’s alarming energy sector policies.” -- Margaret Spiegelman (mspiegelman@iwpnews.com)