June 1, 2021

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Recent changes to the Mexican Hydrocarbons Law (“Hydrocarbon reform“) and the Electricity Industry Act (“Electricity reform”) Can have a significant impact on the operations of foreign investors in the energy sector in Mexico. Recent legislative changes reduce the market power of private electricity, oil and gas producers in Mexico and discriminate against foreign investors.

The hydrocarbon reform grants the government wide discretion to suspend or refuse to renew existing permits granted to private companies, with the corresponding provisions granting the state-owned company Petróleos Mexicanos (“Pemex”) The right to take over facilities from private companies that no longer have a license without compensation.[1] Fundamentally, the hydrocarbon reform aims to recalibrate the existing regulatory framework to rekindle Pemex’s dominance and limit the prevalence of private oil and gas companies in Mexico.[2]

Likewise, the electricity reform puts private electricity providers at a disadvantage by granting an allocation preference to electricity produced by the state-owned Comisión Federal de Electricidad (“CFE“).[3] Prior to this amendment, Mexico’s electricity grid rules prioritized shipment based on the cheapest generated electricity.[4] The Electricity Reform was designed to consolidate CFE’s participation in the market to the detriment of private producers, many of whom produce wind and solar energy.[5]

A Mexican judge has ordered an indefinite suspension of the implementation of the reforms pending a resolution as to their constitutionality in domestic law.[6] If the suspension is lifted, foreign investors may well have a claim under an investment treaty, as discussed below.

Mexico’s energy reforms could violate investment treaty protections

Hydrocarbon and electricity reforms may violate investment treaty protections owed by Mexico to foreign investors who have invested in the state and are protected by an applicable investment treaty. For example, investors from the United States and Canada can arbitrate claims directly against Mexico for violation of the protections afforded by the Investment Chapter in the Agreement Between the United States of America, the United States of America, Mexico and Canada (“USMCA“) and its predecessor the North American Free Trade Agreement (“NAFTA“).[7] In fact, in response to Mexico’s current discriminatory treatment of foreign investors, three US companies filed complaints on May 12, 2021 with the International Center for Settlement of Investment Disputes (“ICSID”) —Finley Resources Inc, MWS Management Inc and Prize Permanent Holdings LLC — on the grounds that Mexico had breached its obligations under Chapter 14 of the USMCA and Chapter 11 of NAFTA.

In addition, investors from Australia, Brunei, Canada, Chile, Japan, Malaysia, New Zealand, Peru, Singapore and Vietnam may also have a claim against Mexico under the chapter on the investment of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (“CPTPP“). Mexico is also party to a number of bilateral investment treaties with more than 20 states that provide for recourse to international arbitration.[8]

The right to national treatment

Investment treaties generally include protection that obliges the host state to treat the investments of foreign investors no less favorably than it treats domestic investors in “like circumstances”.[9] Arbitral tribunals having considered the meaning of “similar circumstances” have concluded that it has a “broad connotation” which requires an assessment of whether “a non-national investor complaining of less favorable treatment is in the same” industry “as the national investor. . . . [this] includes the concepts of “economic sector” and “business sector”.[10]

Although it is not necessary to prove the intention to discriminate, the courts have held that a state measure which “at first sight appears to favor its nationals over non-nationals” is a “factor.[ that] must be taken into account. “[11] The arbitral tribunals added that “[d]discrimination does not cease to be discrimination, nor to attract the international responsibility which arises therefrom, because it is undertaken to achieve a laudable objective or because the achievement of that objective can be qualified as necessary.[12] A previous court held Mexico responsible for violating national treatment protection when a controversial tax “was enacted to protect the Mexican domestic sugar industry from foreign competitors.”[13] The court awarded the investor more than US $ 33.5 million in damages.[14]

Mexico’s reforms are prima facie discriminatory against foreign investors operating alongside public operators Pemex and CFE, with the laws structured so that the negative impact is felt almost exclusively by foreign investors. President Andrés Manuel López Obrador and other members of the government have also publicly stated that the aim of the reforms is to restore state control over the energy sector.[15] As a result, it is questionable whether Mexico is respecting its obligation to accord national treatment under various investment treaties to which it is a party.

The right to fair and equitable treatment

Most investment treaties also include protection granting investors the right to fair and equitable treatment by host states. This includes a right to the “protection of [a foreign investor’s] legitimate expectations, protection against arbitrary and discriminatory treatment, transparency and consistency.[16]

Many Mexican investment treaties require Mexico to treat a foreign investor’s investments fairly and equitably.[17] Arbitral tribunals have ruled that host states like Mexico cannot exercise legislative power “to act in an arbitrary or discriminatory manner, or to disguise measures directed at a protected investor under the guise of general legislation”.[18]

Given the targeted objective and impact of the reforms, affected foreign investors can arguably claim that Mexico has breached its duty of fair and equitable treatment by arbitrarily discriminating against foreign investors. Changes in the legislative framework affecting hydrocarbon permits and electricity distribution may also violate the legitimate expectations of foreign investors.

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Investment treaties can offer important protections to foreign investors operating in markets presenting significant political and legal risks. Gibson Dunn attorneys have extensive experience advising clients in disputes against states for investment treaty violations. If you have any questions about how your business can take advantage of these protections, or if you believe your business has an investment treaty request based on Mexico’s hydrocarbon or power reforms, we would be delighted. to help you.


[1] See here.

[2] See here.

[3] See here.

[4] See here.

[5] See here.

[6] See here and here.

[7] Canadian and U.S. investors in Mexico may file claims against Mexico by July 1, 2023 in accordance with investor-state dispute settlement provisions available under the USMCA’s predecessor, NAFTA, provided the dispute arises from investments made while NAFTA was still in effect. and stayed “existing»On July 1, 2020. See USMCA, Annex 14-C. Thereafter, Canadian investors can seek recourse against Mexico under the CPTPP, and US investors can seek recourse under Schedule 14-D and Schedule 14-E of the USMCA.

[8] See, for example, Kuwait-Mexico BIT, Article 10; China-Mexico BIT, Article 12; Republic of Korea-Mexico BIT, Article 8.

[9] See, for example, Bahrain-Mexico BIT, Article 3 (“Each Contracting Party shall accord to investors of the other Contracting Party and their investments treatment no less favorable than that it accords, in like circumstances, to its own investors”); Belarus-Mexico BIT, Article 3 (“Each Contracting Party shall accord to investors of the other Contracting Party treatment no less favorable than that it accords, in similar circumstances, to its own investors”); Mexico-Slovakia BIT, Article 3 (idem).

[10] SD Myers, Inc. v. Government of Canada, UNCITRAL, Partial Award, November 13, 2000, 250.

[11] SD Myers, Inc. v. Government of Canada, UNCITRAL, Partial Award, November 13, 2000, 252.

[12] Corn Products International Inc. v. United Mexican States, ICSID Case No. ARB (AF) / 04/1, Decision on Liability, January 15, 2008, 142; Quiborax SA and Non Metallic Minerals SA v. Plurinational State of Bolivia, ICSID case n ° ARB / 06/2, award, September 16, 2015, ¶ 253.

[13] Archer Daniels Midland Co. & Tate Lyle Ingredients Americas, Inc. v. United Mexican States, ICSID case n ° ARB (AF) / 04/05, award, November 21, 2007, 210.

[14] Archer Daniels Midland Co. & Tate Lyle Ingredients Americas, Inc. v. United Mexican States, ICSID case n ° ARB (AF) / 04/05, award, November 21, 2007, 293.

[15] See here and here.

[16] Crystallex International Corporation v Bolivarian Republic of Venezuela, ICSID case n ° ARB (AF) / 11/2, award, April 4, 2016, ¶ 543.

[17] See, for example, United Arab Emirates-Mexico BIT, Article 4 (“Each Contracting Party shall accord to investments… Fair and equitable treatment…); Turkey-Mexico BIT, Article 4 (idem).

[18] Rusoro Mining Ltd. vs. Bolivarian Republic of Venezuela, ICSID case n ° ARB (AF) / 12/5, award, August 22, 2016, ¶ 525.

Gibson Dunn attorneys are available to assist you with any questions you may have regarding these issues. Please contact the Gibson Dunn lawyer you normally work with, any member of the firm’s international arbitration practice group, or any of the following:

Penny Madden – London (+44 (0) 20 7071 4226, pmadden@gibsondunn.com)
Cyrus Benson – London (+44 (0) 20 7071 4239, cbenson@gibsondunn.com)
Jeffrey Sullivan – London (+44 (0) 20 7071 4231, jeffrey.sullivan@gibsondunn.com)
Graham Lovett – Dubai (+971 (0) 4 318 4620, ganttt@gibsondunn.com)
Rahim Moloo – New York (+1 212-351-2413, rmoloo@gibsondunn.com)
Lindsey D. Schmidt – New York (+1 212-351-5395, lschmidt@gibsondunn.com)
Marryum Kahloon – New York (+1 212-351-3867, mkahloon@gibsondunn.com)
Maria L. Banda – Washington, DC (+1 202-887-3678, mbanda@gibsondunn.com)

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