USMCA Energy Consultations Could Damage Mexico Economy, Expert Lawyer Says

Mexico needs to reach an agreement during the consultation period with its commercial partners in the United States-Mexico-Canada-Agreement (USMCA) as part of a dispute over energy policies, Teresa Gallegos, an expert attorney in the Mexican energy industry, told NGI’s Mexico GPI

USMCA Energy Consultations Could Damage Mexico Economy, Expert Lawyer Says

If it doesn’t, “Mexico will be in a very unfavorable position which will without question have a negative impact on the national economy,” she said. 

Gallegos, a seasoned senior legal counsel specialized in the energy and infrastructure industry, served previously as the head of legal and compliance for AINDA Energía & Infraestructura in Mexico City from 2018-2022. Prior to that, Gallegos was the head of oil and gas contracts at the Mexican energy ministry Sener from 2015-2017, where she developed the legal processes to determine the bidding rules for oil and gas bid rounds and farmouts. 

Gallegos also served as head of oil and gas contracts at the Comisión Nacional de Hidrocarburos (CNH) from 2015-2017, where she was part of the inter-institutional task force with other government agencies that implemented Mexico’s historic energy reform of 2013. She also worked previously 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 of laws degree from the University of Arizona with a specialization in international trade law, a degree in law studies from the Universidad Panamericana and an undergraduate degree in law from the Tecnólogico de Monterrey.  

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

NGI: What are your thoughts on the consultations that the United States and Canada have requested to resolve the energy related disputes in the USMCA and what do you expect in the upcoming months?

Gallegos: The consultations requested by the U.S. and Canada regarding the formal complaints filed under the USMCA deal with the acts of the Mexican government that are considered unfair treatment of their companies to the benefit of CFE and Pemex. This includes the 2021 reform to the Electric Industry Law, the de facto blockade of a series of projects of private companies to operate in the energy sector, the practice of granting extensions on regulatory compliance only to Pemex, and the action that gives Pemex and CFE a monopoly on the use of the natural gas transmission network.

The U.S. government, which is being cautious and considering its political agenda and eagerness to cooperate with the Mexican government in areas such as migration and security, attempted unsuccessfully to engage in dialogue with high-ranking members of the Mexican government prior to the presentation of the consultations. Amid a lack of agreement and clear actions by the Mexican government, which created uncertainty for investors and failed to comply with the Mexican legal framework that applies to the energy sector portion of the USMCA, the U.S. opted for the consultations, uniting with Canada to attempt to solve the controversies.

The current Mexican administration is sustained by a populist ideology that goes against the rule of law. President López Obrador, or AMLO, centers his discourse on returning the country to the people, and trying to use the history of the nation to explain how the country must defend itself against foreign interests. He does this by emphasizing that the state companies Pemex and CFE must spur national development. He 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 advances of the consultations with the U.S. and Canada regarding the USMCA. However, AMLO, as well as other members of his cabinet, have reiterated that the Mexican government doesn’t intend to leave the USMCA, nor break the commercial relationship with the U.S., and has recognized 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 exports and remittance growth.

NGI: How long do you think the consultations process will last?

Gallegos: Analysts predict that the resolution to the controversy could extend into May 2023, considering the stages of the process that are required prior to the emission of the final report presented by a panel of specialists. This will be done prior to the commencement of electoral periods in both the U.S. and Mexico in 2024. AMLO may also use this political discourse as a prelude to the electoral period.

The consequences of not arriving at an agreement in the short term is that AMLO will persist with his energy policy. If the panel of experts emit their final report ruling against the Mexican government for noncompliance with the USMCA, the United States and Canada will have the right to demand compensation or impose tariffs to key Mexican products, which would put Mexico in a very unfavorable position which will without question have a negative impact on the national economy.

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Mexico is attracting foreign direct investment due to the change in global trade known as nearshoring. However, Mexico may lose this opportunity. The loss of confidence and uncertainty generated by Mexican policy, not only in the energy industry but in other sectors as well, is disincentivizing investment. The imposition of tariffs will principally affect the manufacturing sector, which according to the National Statistics Institute, INEGI, represents 87% of the country’s total exports.

NGI: There’s been a lot of conversation in the energy sector lately about the decree by Sener issued in June that would require natural gas supply to be sold exclusively to “a productive company of the state” such as 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 Sistrangas operator Cenagas defines the strategy of the current administration aligned with the energy policy to “rescue” Pemex and CFE.

The strategy is based on establishing a criteria for users or interested parties to receive natural gas transport service at their receipt points from Sistrangas. Users must credit the receipt of supply to the productive companies of the state, Pemex or CFE or their subsidiaries.

But the energy reform of 2013-2014 isn’t a group of rules for private participation. It is a national strategy to accomplish efficient and competitive development of the gas and electricity markets. The separation of activities and open access allows for competition among multiple agents, which promotes the development of competitive and integrated energy markets. 

If the current strategy proposed by Sener is followed and its criteria is applied, it makes open access conditional and discriminatory within the pipeline system that is operated by Cenagas, which would artificially strengthen the state companies and supplant vendors, creating a monopoly for the state companies, which violates the constitution and the current competition laws. This would deteriorate market supply conditions and consequently increase fuel prices, which would be transferred on to the final consumers.  

NGI: Much of the rhetoric of the current administration has criticized foreign investment in the energy sector, though in recent weeks, the government has awarded large contracts to U.S.-based New Fortress Energy Inc. and Canada-based TC Energy, for example. In your opinion, what do these contracts indicate in terms of the government’s position regarding foreign investment in the sector?

Gallegos: The federal budget allocates resources principally for 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. As a result, CFE and Pemex don’t have sufficient resources to carry out energy infrastructure projects that Mexico requires to satisfy the demands of the population and guarantee energy security.

For that reason, Mexico requires investment from private energy companies in the sector and the state companies have constructed strategic alliances with them. Given the entire portfolio of investment projects that are offered by private companies, and the needs of the Mexican energy sector, it’s allowed CFE and Pemex to form these alliances to strengthen the energy policy of the current administration.

At the same, the investment portfolio of TC Energy Corp. also includes the construction of the Tula-Villa de Reyes and Tuxpan-Tula pipelines, which since 2019 were subjected to international arbitration processes brought forth by CFE. It wasn’t until 2022 that CFE arrived at an agreement with TC Energy and, in exchange for rescinding the arbitrations, signed a deal to resolve the social problems and continue with the construction of the pipelines. 

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

In additional to these infrastructure projects, in the previous administration, CFE awarded TC Energy other natural gas pipeline projects to satisfy the strategic demand for natural gas for the generation of electric energy, including the marine pipeline from south Texas to Tuxpan that connects to the Dos Bocas refinery, which was awarded to TC Energy and IEnova in a public bidding process in 2016. At the same time, CFE is looking to consolidate the five natural gas transport contracts into one and obtain a 15% stake in the company TGNH, a TC Energy company, and increase its stake to 45% in the southeast extension project beginning in 2025. 

New Fortress has made strategic alliances with Pemex as well as CFE to develop energy infrastructure projects in natural gas. In alliance with Pemex, New Fortress will develop a project for the supply of natural gas to the domestic onshore market in Mexico and will invest in the continued development of the Lakach field, a deepwater offshore area operated by Pemex to devolved a Fast LNG project to liquefy a large part of the natural gas produced in the field to export it to the global market. 

With CFE, New Fortress will carry out an investment to expand and extend the supply of natural gas to multiple installations for CFE energy generation 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 CFE’s existing pipeline.

USMCA Energy Consultations Could Damage Mexico Economy, Expert Lawyer Says