Mexico moves to strip fuel market permits

Mexico's government has proposed legislation that would allow the energy ministry and energy regulatory commission (CRE) to more easily strip fuel market participants of their operating permits.

The move is the latest manifestation of the government's rollback of a 2014 energy reform package that opened Mexico's long-cloistered oil industry.

The bill, presented to congress yesterday, is likely to pass because President Andrés Manuel López Obrador's Morena party holds the simple majority in the legislature required for approval.

Under the proposed legislation, an expanded group of holders of permits issued under the 2014 hydrocarbons law for fuel imports, exports, marketing, distribution, retail, transport and storage of fuels, crude and natural gas would be required to prove compliance with a minimum fuel storage policy. The existing law mandates that most participants have inventories for gasoline and diesel equivalent to five days of sales.

The government can currently sanction companies that do not comply with the storage policy but allows them to keep operating. Under this proposal, the permits would be revoked almost immediately. The proposal also expands this obligation to fuel transporters, while it currently only applies to fuel traders, importers, distributors and retailers.

The wording of the bill is ambiguous, as "all permits" could include crude and gas permits, while only gasoline, diesel and jet fuel have a stated minimum storage policy.

Because of the nature of the regulated activities, some existing permits would be unable to comply with the requirement, said Diego Campa, partner at Campa and Mendoza, a Mexico City-based law firm specialized in energy and natural resources.

As the bill is currently drafted, on the first day of the legislation's approval, the energy authorities could revoke all permits from firms that are out of compliance. Under current requirements, some companies have already been struggling to comply with the minimum storage mandate because of ambiguities in existing regulations, and the government has also delayed permits to build new storage infrastructure.

One safe harbor for companies to provide proof of its storage could be to show storage credits bought from other companies, known as tickets. The bill presented yesterday does not indicate if that would be allowed.

The bill also does not address the current exemptions of certain permit holders from the storage mandate, in light of Mexico's prohibition on retroactive application of laws.

The bill adds a new article to the hydrocarbons law (Article 59 Bis) to include, define and state the cause of a permit suspension. With this addition, the energy ministry and CRE can "suspend permits temporarily when foreseeing an imminent danger to the country's national security, energy security or the national economy."

If a permit is revoked, the bill would give state-owned oil company Pemex and utility CFE exclusive access to the associated infrastructure. If the permit of a privately owned fuel storage terminal is suspended, for example, only Pemex or CFE could use it. Authorities do have to justify the suspension for a valid cause in writing, and if the permit holder modifies the reason under which the permit was suspended, authorities must reinstate the permit.

The bill also proposes to include smuggling and illicit traffic of hydrocarbons, refined products and petrochemicals as immediate cause to revoke a permit, as well as any second offense to the hydrocarbons law.

If the controversial government-sponsored electricity bill serves as a guide, the fuel permitting bill could be swiftly passed through the congress without any major changes, with lawmakers following party lines and the president's instructions. But it could also be challenged in Mexican courts, which have stopped the electricity bill through a wave of injunctions.

By Sergio Meana