Proposed Changes to the Mexican Hydrocarbons Law

On March 26, 2021, the President of Mexico sent a bill to the Chamber of Deputies aimed at amending several provisions of the Hydrocarbons Law (the “Bill”). In contrast to the recent amendment to the Electricity Industry Law, which was submitted as a preferential bill, this Bill does not have such status, so it will be debated and voted on by both chambers of Congress following the ordinary legislative process. However, it is expected that the Bill will be approved promptly as the coalition of political parties aligned with the President still holds a majority in the Chamber of Deputies for the time being. Note this situation could change as mid-term elections will be held in June.

The main changes proposed in the Bill are as follows:

1. Minimum storage of petroleum products. A new condition is added for the issuance of all permits granted in accordance with the Third Title of the Hydrocarbons Law, which would require applicants to prove compliance with the minimum storage capacity established by the Department of Energy (“SENER”). Although this requirement appears to apply to all regulated activities, the purpose of the Bill is to target permits for the distribution, commercialization and importation of petroleum products.

According to the current Public Policy for Minimum Storage of Petroleum Products, the mandatory minimum inventory of gasoline and diesel is five days, for jet fuel it is 1.5 days at airports and airfields, and 1.5 additional days as a monthly average. Such policy states that “commercialization and distribution companies that certify their lack of the required infrastructure to have enough storage capacity, and therefore are not in a position to comply with the 50% minimum storage requirement in the terminal for the supply of their target market via truck, may make up the deficit at other terminals located in Mexico.”

Pursuant to the fourth transitory article of the Bill, petroleum products distribution, commercialization, and importation companies which fail to comply with these requirements will have their permits revoked.

2. Temporary suspension of permits due to imminent danger to national security, energy security or national economy. The Bill includes the possibility of suspending permits if doing so would protect certain national interests. For the sake of continuity of the operations under a suspended permit, the government authority may hire only State productive companies, and not third parties, to handle and control the occupied, intervened, or suspended facilities.

3. New grounds for permit revocation. The following causes to revoke a permit are added:

a. Committing the crime of smuggling hydrocarbons, petroleum products or petrochemicals.

b. Recurring noncompliance with applicable regulations as to quantity, quality and measurement of hydrocarbons and petroleum products.

c. Recurring noncompliance with proving the legal acquisition of hydrocarbons, petroleum products or petrochemicals during any activity of the supply chain, including transportation, storage, distribution, or sale to the public of said products.

Additionally, in its transitory articles the Bill provides that permit holders that do not comply with the corresponding requirements, or that breach the provisions of the Hydrocarbons Law, will have their permits revoked.

4. Automatic denial of permit assignments. The consequences arising from a failure of the government authority to respond to a request to assign a permit would be amended. Currently, Article 53 of the Hydrocarbons Law states that the authority shall resolve an assignment application within 90 calendar days and, in the event a decision is not made within such period of time, it shall be deemed approved. The Bill proposes to amend this article to state that, if there is no response from the authority during the aforementioned term, such application shall be deemed denied.

As with other actions taken by the current administration regarding energy matters, it is expected that affected parties will challenge this amendment if it is approved and published.  Possible arguments would include that the Bill unjustifiably benefits a single market participant: Petroleos Mexicanos (“Pemex”). The Bill undoubtedly confers broad discretionary authority to SENER and the Energy Regulatory Commission, to the detriment of legal security for permit holders, possibly damaging the certainty of their investments. 

CCN will closely follow the legislative process of the Bill and will be available to evaluate the impacts that the Bill may have on companies operating in Mexico.

Contact Information:

José María Lujambio | jmlujambio@ccn-law.com  

Antonio Riojas | ariojas@ccn-law.com.mx