Recent Legal Wins in Mexico Unlikely to Lift Regulatory Paralysis: Sources – OPIS

Recent injunctions obtained by private energy companies against the Mexican government set an important precedent, but these legal victories will not likely solve the regulatory paralysis in the country’s downstream market, legal sources have told OPIS.

Lower courts permanently suspended the latest fuel import permit rules from Mexico’s Energy Department (SENER) this week and ordered that the country’s Energy Regulatory Commission (CRE) reinstate the original time periods for permit applications in the power sector. “Winning all these juridical battels won’t allow us to win the full war,” said Marcial Diaz, directing partner of Mexico City-based consulting firm Lexoil, told OPIS.

The regulatory paralysis will not likely be resolved unless President Andres Manuel Lopez Obrador’s administration changes its perspective on private energy investments or his term ends, said Bernardo Cortez, a partner with Mexico City-based legal firm Dentons Lopez Velarde. Both lawyers said the paralysis would continue as both CRE and SENER can exercise discretion on the approval or rejection of energy permits.

“These injunctions are putting a check on the government in this energy chessboard…. However, they aren’t the checkmate needed to allow free market participation,” Cortez added. Companies still interested in investing in Mexico could fight permit rejections from SENER and CRE in administrative courts. However, these processes will be lengthy, up to 16 months, added Cortez. This legal move could be used by marketers investing in new storage facilities and import facilities and require 20-year permits to bring fuel into Mexico, Cortez said. He added that neither he nor any of his clients have heard of any company that has fought against SENER or CRE in administrative courts to secure the permits needed to unlock their projects, he added.

“Even if you have an injunction against CRE, the regulatory body could take the time to analyze your permit request to end rejecting it finally,” Diaz said. Recent injunctions obtained by the private sector set important precedents. However, these victories alone will not solve the obstacles the energy industry faces in Mexico, he added. Even if an opposition coalition wins the upcoming midterm elections and assumes control of the lower congressional chamber, it will be difficult to set additional checks and balances on CRE and SENER’s discretional permit approval via legislative changes, Cortez said.

From a legislative perspective, Lopez Obrador’s Morena party and its allies still control the Senate chamber, preventing a winning coalition of opposition parties from implementing its political agenda, Cortez said. “Under this scenario, opposition parties will try to negotiate to reach a consensus with Morena. However, there is no certainty this scenario would end the regulatory obstacles companies face today,” he added.

Mexico Has Not Sanctioned Suppliers Unable to Comply with Inventory Policy – OPIS

Nearly three months after being enacted, Mexico has not sanctioned any fuel supplier unable to fulfill obligations under the country’s Public Policy on Minimum Fuel Inventories (PPMFI), sources told OPIS.

Starting on July 1, the policy requires marketers and distributors to stock five days of sales to end-users. Companies without storage capacity can fulfill the policy via tickets, a financial rights tool that grants them ownership of another marketer’s inventories. Considering Mexico’s storage capacity shortages and that most of the existing terminals are under Pemex’s control, it is unlikely the whole market will comply with the policy, analysts and suppliers have told OPIS. CRE did not respond to comment requests from OPIS about the issue. A fuel marketer told OPIS it has not been able to comply with the PPMFI fully. Still, it has not been notified or sanctioned by Mexico’s Energy Regulatory Commission (CRE) to date.

“We have the sense the regulator isn’t following with the implementation of the policy,” the source added. The marketer said it had reported monthly the fuel stocks it holds via inventory tickets, although they are not enough to comply with the policy fully. “CRE hasn’t given any clear messages or directions regarding the enforcement of the policy,” the source added. The marketer said complying with the policy has resulted in higher fuel costs to its end customers. “It is frustrating to think some of our competitors might be offering lower prices because they aren’t complying with the inventory policy,” the source added. In July, OPIS had previously reported that complying with the policy could result in fuel prices increasing by 0.2 pesos per liter, a figure marketers agreed with. Legal firms Ursus Energy and Lexoil told OPIS none of their marketing and fuel distribution clients had been sanctioned for unfulfilling the PPMFI.

The CRE did not respond to requests for comment from OPIS. Marcial Diaz, Lexoil directing partner, said the regulator had not mapped the steps to take to fulfill the policy or were unwilling to enforce it. Diaz suspects that one of the reasons why the policy has not been implemented could be that Pemex has not signed ticket contracts with all its clients. “About 90% of the marketers and distributors acquire fuel from Pemex,” Diaz said.

In July, Pemex sent Letters of Mutual Intent to all its clients confirming it has enough storage capacity for them to comply with the PPMFI, adding it would sign ticket contracts within 90 days. This 90-day period ends on Sept. 30, and Lexoil has not confirmed Pemex had signed any contracts to date, Diaz said.

Constraints Could Lead to Legal Actions Against Mexico’s Inventory Policy – OPIS

MEXICO CITY – Without enough access to fuel inventory tickets, companies might declare force majeure or seek legal injunctions against Mexico’s Public Policy on Minimum Fuel Inventories (PPMFI), market observers told OPIS. Mexico will implement its policy starting on July 1, requiring marketers and distributors to store five days of sales to end-users in strategic inventories. However, Pemex controls most of the country’s limited storage capacity. As a way to fulfill the policy, Mexico’s Energy Regulatory Commission (CRE) will oversee a ticket market where marketers and distributors without storage capacity can acquire the financial rights over inventories from another marketer. If market participants cannot secure tickets, they could resort to declaring force majeure to CRE about their inability to fulfill the terms of the policy, said Rosanety Barrios, a Mexico City-based independent energy analyst, told OPIS.

“No one is obligated to fulfill the impossible,” said Barrios, adding that companies would need documented evidence they were unable to secure inventory tickets to make the declaration. CRE has not published the final rules for the emission of tickets nor the penalties for those unable to fulfill the inventory policy.

“The lack of guidelines is submerging the industry in uncertainty,” Barrios added. OPIS on June 4 reported on a leaked draft of CRE ticket rules that ticket costs and contracting models will be set freely by the market following free economic competition rules. Companies unable to fulfill the policy could get their marketing permits revoked as the maximum penalty after multiple warnings, according to the drafted rules.

The risk of getting permits revoked considering Pemex’s dominant market position in the storage market and concerns about open access to acquire tickets is worrying, said Marcial Diaz, director of Mexican energy legal firm Lexoil. The policy began being implemented when CRE requested companies to voluntarily report their volume of inventories during the first half of June, Diaz said. Two Mexican fuel marketers told OPIS that it is likely that many companies will introduce injunctions against the PPMFI as those companies with storage capacity are trying to sell their tickets tied to long-term supply contracts.

“Sadly, all energy issues in Mexico are being solved by lawyers in courts and not by policy and energy experts,” Diaz said. Following the law, Mexico’s National Regulatory Enhancement Commission (CONAMER) would then review the ticket emission rules considering feedback from market participants. However, Mexico has released major policy and regulation without holding public consultations at CONAMER such as the Policy on Reliability, Security, and Continuity of the Power System on May 15, curtailing the entrance in the operation of private renewable generation projects, generating opposition from industry and the European Union and Canadian government.

The reliability policy has generated dozens of legal processes by private renewable generation projects that have led to court injunctions against the policy and the government. “What is happening with renewable energy operators might end up happening with the fuel sector where judges end deciding the fate of new projects, investments, and private market participation,” Diaz added. Under economic competition rules, Pemex should not tie the sale of inventory tickets to other services such as a supply contract, but the state company has offered tickets primarily to its marketers and distributors, Diaz said.

“Pemex is telling competitors to hold on the queue as it is fulfilling the ticket requirements from its associated marketers and branded distributors first,” he added. “We will see if COFECE (Mexico’s Antitrust Agency) will take cards on the issue and investigate ticket sales.” Another major concern is if fuel import permits granted by Mexico’s Energy Secretariat (SENER) will be conditioned to fulfilling the PPMFI requirements, Diaz said.

“At the moment authorities are requiring among other things that marketers have a storage contract to grant an import permit,” he added. The industry is concerned that the PPMFI could curtail competition, pulling Mexico back five years ago to the starting line of market liberalization, Diaz said. “We will end with a market with different retail stations brands and colors but all being supplied with Pemex fuel,” he added.

Market to Set Mexico’s Inventory Ticket Prices, Terms: CRE’s Rule Draft – OPIS

MEXICO CITY — Mexico’s Energy Regulatory Commission (CRE) is gearing toward the release of guidelines for the emission of financial-rights tickets for the fulfillment of the country’s Public Policy on Minimum Fuel Inventories (PPMFI).

OPIS had access to the ticket emission guidelines expected to be released by CRE in the coming days, according to a source close to the situation. Tickets will be emitted only by fuel marketers with excess inventories at a price set freely by the market. Storage facility operators won’t be able to sell tickets. “The conditions of costs, contracting and in general, conditions of commercial strategy, will be subject to free negotiation between the parties,” CRE states in the guideline draft. Companies unable to fulfill the policy could get their marketing permits revoked as the maximum penalty after multiple warnings, according to commentaries shared by Mexico City-based consultancy energy firm Lexoil of the CRE-drafted guidelines. However, any terms set by counterparties must follow the norms established in free economic competition and guidelines for the emission and purchase of tickets, CRE adds.

The PPFMI enforcement starts July 1, requiring fuel marketers to hold strategic reserves of five days of gasoline and diesel sales between November 2019 and May 2020 and three days of jet fuel inventories split between airports and storage facilities. To provide operative flexibility and guarantee the market liquidity to fulfill the PPMFI, the policy allows the emission and purchase of tickets to acquire the financial rights over inventories held by third parties, the draft states. Under the financial rights obligations, the inventory holder is obligated to sell the stock to the ticket owner in case of fuel supply disruptions or product shortages, the guidelines indicate. Ticket buyers and sellers must register their transactions via an online portal set by CRE within 30 days of the purchase, including the buyer, seller, price, inventory region and product breakdown. CRE’s online platform will automatically verify the balance of each marketer and distributor to ensure it doesn’t exceed its existing inventories, the guideline draft shows. Companies with offtake contracts on facilities still under development will be required to hold tickets until their facilities startup, CRE indicated.

Operative volumes from transload activities will not count as strategic inventories, CRE said. Therefore, the use of car trains or vessels as storage of strategic lists isn’t allowed. If scheduled maintenance decreases the capacity for a facility to store fuel, marketers are obligated to acquire tickets for another facility until the work concludes. Also, ticket sellers must ensure the product stored to fulfill the specification norms set by CRE. Based on the guidelines, ticket buyers should try to hold half of their inventories on the last-mile terminal they typically use to supply their end-users. If this isn’t possible, companies can use storage facilities or hold tickers for stocks in any part of Mexico. Regarding sanctions, CRE will give a five-day notice for companies to respond regarding any suspected or confirmed irregularities. If the company with its first response doesn’t solve the matter, it will have three days to correct any problems. If not, CRE will impose a sanction. Inventories held by companies can be released only after the declaration of an expected emergency by Mexico’s Government Coordinating Council for the Energy Sector.

Market participants have to notify the release of inventories to CRE as well as the time frame to replenish stocks. In the case of an emergency, market participants can use inventories set apart under the PPMFI. However, companies must justify the crisis to CRE within two working days after the event. The commission can evaluate the ticket market at any time and introduce new regulations to ensure a reliable, stable, and secure supply.

Mexico’s CRE Contemplates Halting Non-Pemex Retail Permits – OPIS

MEXICO CITY – Mexico’s Energy Regulatory Commission (CRE) is considering halting the approval of all retail permits except those related to Pemex, according to leaked emails from the regulators seen by OPIS. In the emails dated April 24, CRE officials state that only retail permitsbrelated to Pemex would be granted until commissioners approve new General Administrative Directives in their next governing body session. A CRE spokesperson said the regulatory body did not recognize the documents. However, multiple sources validated the existence of the emails and internal discussions about the issue within the commission.

This internal memos follows President Andres Manuel Lopez Obrador’s vision for the energy sector, Santiago Arroyo, director of Queretaro-based consultancy URSUS Energy, told OPIS on Monday. “Both Lopez Obrador and his Energy Secretary Rocio Nahle have expressed their desire to return Pemex dominant position in the retail market,” said Arroyo, who specializes in energy law.

“These memos are a worrisome move for the market that could kill competition,” he added. According to a source close to CRE, this initiative has been handled internally by selected high-ranking officials working with CRE commissioners. “No order has been given to the different divisions inside CRE at the moment to carry these instructions,” the source said. In September, CRE Commissioner Jose Alberto Celestinos told OPIS at a forum that approving permits for retail stations tied with foreign brands could be troublesome for Pemex.

“There were too many permits requests for fuel stations… We have to be careful of not granting too many permits,” Celestino said in response to reporters inquiring about why CRE is so delayed on approving new permits for service stations. Celestinos said that granting permits for service stations tied to foreign brands could be a problem for Pemex to allocate its own product once it ramps up operations at its refineries. Shortly after, CRE said in a statement that Celestinos’ comments did not represent the commission’s official position. The emails raise concerns among market participants as before the coronavirus disease 2019 (COVID-19), sources discussed difficulty in securing CRE approval forr new retail permits. Due to the health crisis, regulatory agencies in Mexico suspended all periods to approve new permits. Before, it would take one month for CRE to approve any retail-related permits for Pemex branded stations, said Arroyo.

Meanwhile, permits related to another brand would take three months after considerable back-and-forth. “They used any excuse, even illogical ones like requesting a comma, to delay granting non-Pemex retail permits,” Arroyo said. “Now, with the COVID-19 outbreak, they could simply stop granting permits without needing excuses.” These changes would paralyze Mexico’s fuel market, Marcial Diaz, directing partner of Mexico City-based consulting firm Lexoil, told OPIS. “It is a fact that in the latest CRE meetings, commissioners approved by far more retail permits related to Pemex,” he said.

“This is fostering the feeling that in Mexico, there is unfair competition against non-Pemex brands,” he added. Arroyo said the measure violates constitutional rights introduced by the energy reform for consumers to choose their private companies from participating in the fuel sector. “This could become a dictatorial move that restricts the economic activity,” Arroyo said. “We know this is in the pipeline, and we know what is going to happen next,” he added. Daniel Salomon Sotomayor, an associate with the Mexico City-based legal firm González Calvillo S.C., told OPIS that it is unlikely CRE moves ahead with this plan.

“CRE has operated with a certain degree of independence for the last 25 years under a clear mandate to foster competition,” Salomon said. “Restricting non-Pemex permits would be against the law and could be prosecuted in courts,” he added. “We are at early stages to know if this plan would become real,” said Salomon, adding that if implemented, Mexico’s Antitrust Agency (COFECE) could take on this issue.

Mexico Should Postpone Minimum Fuel Inventory Policy Amid Lack of Enforcement Rules – OPIS

MEXICO CITY—Mexico should consider postponing a Public Policy on Minimum Fuel Inventory Levels (PPMFI) as uncertainty grasps the industry as the authorities have not released enforcement rules, analysts told OPIS. Mexico’s Energy Secretariat (SENER) communication team told OPIS it is not considering postponing the PPMFI despite the suspension of its activities until May amid the coronavirus disease 2019 (COVID-19) sanitary emergency the country is undergoing.

The government should postpone enacting the PPMFI amid the lack of clarity on its implementation, Rosanety Barrios, a Mexico City-based independent energy analyst, told OPIS. The policy is set to be enforced on July 1, requiring fuel markets to store five days of fuel sales. However, it is yet to be known what penalties market players face for not fulfilling the requirements, Barrios said. The policy allows marketers without access to storage capacity to acquire inventory tickets to fulfill it.

However, how the ticket system will work is unknown, which includes how tickets will be emitted, traced, and validated, Barrios said. Marcial Diaz, director of Mexico City-based energy consultancy Lexoil, told OPIS validating tickets could be a challenge for the Mexican government, especially considering the investments SENER may need in staff to enforce the policy. Marketers could confirm an inventory ticket is valid by reviewing that the listed company has a valid CRE storage permit. However, there is no way to verify at the time a player is not emitting more tickets than the capacity it currently holds. For example, a company could have a storage permit for 1 million bbls in a new project. However, it only has 300,000 bbl built at the time. “Who is going to monitor so no storage operator oversells tickets? Or that no fraudulent tickets are emitted?” Marcial said.

Without clear enforcement rules and adequate traceability and validation, the result could be a ticket system vulnerable to corruption and fraud, Chevron and Marathon Petroleum said last year during a public consultation on the PPMFI. During the public consultation, other stakeholders said that competition could be affected by a lack of clear guidelines on the mechanism, such as non-discriminatory access to tickets and their transparent emission.

The administration has not released information on how the policy will be enforced, and there may be challenges to publish it and hold public consultations on the impact during the COVID-19 Pandemic, Barrios said. “Seems like SENER and Mexico’s Energy Regulatory Commission are pushing the ball to each other, and no one wants to make the enforcement rules,” she added. The PPMFI was introduced under President Enrique Peña Nieto in 2018. However, it never had the time to publish the enforcement rules. Initially, the policy sought to increase Mexico’s fuel inventory levels to 13 days of demand from two days in 2013. However, the administration of President Andres Manuel Lopez Obrador cut the PPMFI requirements in December 2018 from 13 days to five days by 2024. The government also replaced regional storage requirements with nationwide storage requirements, disregarding where the stored inventories and the end-users are located. In the end, Diaz believes the fate of the PPMFI may be the same as Mexico’s Fuel Specification Norm (NOM-016). “

The policy will continue being watered down, ending as a light, low-fat, lactose-free version.” Concerns PPMFI Could Limit Competition The industry is waiting for Mexico to emit the penalties for those companies that can’t follow the PPMFI. “If you can’t fulfill the inventory requirements, could your permit be revoked? No one knows,” Diaz said. Since mid-2019, the SENER government has been subjecting the approval of fuel import permits to the existence of a storage contract. “Those players who seek to renew their imports without access to storage tickets might be left out of the market,” Diaz said.

Marketers may aggressively seek tickets, and Pemex is most likely the company in aa position to serve that demand. Pemex not granting tickets to third parties to block market competition is irrational, note Barrios. Pemex, in its last business plan, disclosed its operative fuel storage capacity as 15.5 million bbl. In comparison, OPIS estimates a limited number of private companies hold less than 2 million bbl of storage capacity at the time across Mexico. These include Glencore, Vitol, ExxonMobil, Marathon Petroleum, Shell, and Koch Industries. “Considering Pemex is drowning, inventory tickets are a good opportunity to generate revenue,” Barrios said. “But if there is nothing that forces Pemex to grant tickets, this policy will generate more judicial uncertainty than energy security.”

Lexoil clients are following very closely if Pemex will grant storage permits. “To date, Pemex has made many promises it will emit tickets, but no one has seen a signed contract for one. Much less, no one knows what their price should be or if Pemex has enough storage capacity available for all its clients,” Diaz added. “Mexico is a country being brutally questioned in terms of juridical terms. Using the (PPMFI) as a tool to block Pemex’s competitors would tear the country’s image,” said Barrios, adding it is unlikely such a scenario could happen. Such a speculative scenario is rooted in the preference the Lopez Obrador’s administration has on supporting state-owned enterprises over private companies, Barrios said. However, the lack of information on the policy’s enforcement fuel speculation, she added. Paulina Gallardo, an IHS Markit downstream analyst covering Latam, told OPIS that SENER and CRE should reconsider the current PPMFI mandate.

“Pemex has yet to guarantee any storage tickets and private infrastructure is, at least currently, not readily available. This creates a situation which benefits Pemex over private companies, especially smaller local players,” said Gallardo. The current economic situation, which could worsen, may lead to increased and unnecessary additional costs to many of these private companies hurting and already struggling industry, she added. If the Mexican government postpones the implementation of the PPMFI by another year, that would allow the industry to react to the PPMFI’s implementation guidelines and rules, new terminals to come online, and Pemex to sign ticket contracts before its implementation, Diaz said. Barrios said the intended goal of the PPMFI was to strengthen Mexico’s energy security. However, amid falling demand and overflows of fuel inventories worldwide amid the COVID-19 Pandemic, it is doubtful Mexico faces supply disruptions soon.

These unique circumstances could ease the postponement of the policy, she added.

–Reporting by Daniel Rodriguez, drodriguez@opisnet.com; Editing by Eric Wieser, eric.wieser@ihsmarkit.com

COVID-19: Mexico Halts Energy Reg. Approvals, Affecting Storage Projects – OPIS

MEXICO CITY — The coronavirus disease 2019 (COVID-19) has brought a stop to the development of new fuel storage terminals as Mexico’s energy regulatory system suspended the process of new permits until the end of April due to the pandemic. Mexico’s Energy Secretariat (SENER), Energy Regulatory Commission (CRE), and Environmental and Industrial Safety Agency for the Energy Sector (ASEA) published the suspensions last week in the Government Official Gazette (DOF). According to CRE records, there are over 20 storage projects under evaluation by the regulatory body, including projects near to completion such as the Terminal de Rio Bravo in Matamoros, Tamaulipas, and Itzoil’s NUUP in Guadalajara, Jalisco.

This suspension is set to end on April 17. However, it will likely be extended as Mexico enacted a sanitary emergency on Monday as COVID-19 cases in the country exceeded 1,000. The Mexican government expanded on Monday its suspension of all non-essential government and private activities until April 30, 10 days more than initially set. Lawyers told OPIS that the suspension is going to hurt further an already battered Mexican energy sector that has faced a regulatory bottleneck since President Andres Manuel Lopez Obrador took power in December 2018.

“This is a hit to the sector considering there were already many delays in the approval of permits and verifications. … This is going to paralyze the sector even further,” Marcial Diaz, directing partner of Mexico City-based consulting firm Lexoil, told OPIS. The most likely outcome is that the suspension of approval terms will extend until the COVID-19 situation is controlled, something that could take many weeks or even months, Diaz said. May will be a key month to track for Diaz as energy regulators might restart activities at different times, pending how the COVID-19 pandemic is controlled across the country.

“Suspending the terms to approve new permits isn’t the only challenge but also the personnel shortage and the limited know-how of the regulators,” he added. Santiago Arroyo, CEO of URSUS Energy Consulting, a Queretaro-based consultancy, told OPIS it could take three months before regulators begin operating normally if the suspension is lifted in April. “In the industry, we are considering people at CRE, and other regulatory bodies are going away on vacation,” Arroyo said.

With this, the suspension on new regulatory permits means it is unlikely new storage permits will receive the greenlight by Lopez Obrador’s administration until the end of the year or even the first half of 2021, Diaz said. A growing concern is a freeze on the regulatory approval for a change in ownership of retail stations, an area Arroyo expects to be severely impacted by the suspension in regulatory activities. At the time, CRE is evaluating over 450 ownership transfer requests. Arroyo is more optimistic that the government will prioritize the approval of new storage permits.

“The ideology has played in our side on this one as the government knows that having greater storage capacity goes in line with their energy sovereignty goals,” he added. The suspension of activities could also put at risk the market oversight, Arroyo said. “We could see some players abusing the market by importing products illegally without paying taxes or selling products with an overprice.” According to an OPIS assessment, taxes charged on fuel imports are over twice the cost of the fuel itself. Another area of concern for the industry is going to be the approval of new import permits by SENER, in which the number of approvals was cut significantly last year as the government introduced stricter requirements. “It is okay as an authority to increase the requirements. However, the number of permits approved has been limited due to the excessive red tape,” Diaz said.

The government should be more flexible — especially with companies already operating in the market — in its prerequisites for import permits as it requires the volume in supply and end-sale contracts to match, he said. “This is something unreasonable considering the nature of the fuel marketing sector where players invest expecting to grow their supply portfolio,” he added.