Mexico Hydrocarbon Policy: Socialism as Usual

By Robert Bradley Jr. -- October 3, 2018

“Public [socialistic] resources are really private, owned and exploited by a political elite, while private resources are really public, owned and managed by a multitude. Government-owned resources do not ‘belong to all of the people’ and allow ‘self determination;’ they belong to none or a very few.”

A recent communication from Hector Castro Vizcarra, Minister for Energy Affairs of the Embassy of Mexico, affirms that it is business-as-usual regarding the revised NAFTA agreement for the internal workings of Mexico’s policy for oil and gas (see the official summary below). 

“Mexico´s inalienable and impresciptible property on hydrocarbons in Mexico´s subsoil” remains resolute. (Nationalized in 1938, Mexico’s oil and gas sector turned 80 this year.)  And Mexico can otherwise regulate its oil and gas sector as it sees fit regarding foreign investment. Enter Petróleos Mexicanos, the monopoly government oil company of the country (with small exception).

PEMEX describes itself as

the most important company in Mexico and one of the largest in Latin America…. As the largest tax contributor to the Mexican government, the income we generate helps support all three levels of government: federal, state and municipal. We directly and indirectly participate in the economic and social development of our country….

Pemex has become one of the few fully integrated oil companies, developing our entire productive chain: exploration, production, industrial processing/refining, logistics and marketing.

We carry out extensive exploration and extraction projects every year, generating approximately 2.5 million barrels of oil daily and more than 6 million of cubic feet of natural gas [SIC]. We have 6 refineries, 8 petrochemical complexes and 9 gas processing complexes, where we produce multiple refined products in order to attend to our customer’s needs.

Logistically, we have 83 land and maritime terminals, as well as oil and gas pipelines, maritime vessels, and varying fleets of ground transportation in order to supply over 10,000 service stations throughout the country.

But what would the oil and gas production be in Mexico if private Mexican companies and foreign capital and entrepreneurs were at work compared to the paltry output above? As well documented by Guillermo M. Yeatts in Subsurface Wealth: The Struggle for Privatization in Argentina (FEE: 1997), the tragedy of South American countries has been to put a political elite ahead of decentralized private wealth creation via resource socialism. As I explained in the Preface of Yeatts’s book:

… public resources are really private, owned and exploited by a political elite, while private resources are really public, owned and managed by a multitude. Government-owned resources do not “belong to all of the people” and allow “self determination;” they belong to none or a very few. Nor can private development of mineral resources be slandered as “exploitative.”

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The COMMERCIAL AGREEMENT UNITED STATES – CANADA – MEXICO (USMCA) for the ENERGY SECTOR follows:

The modernization of the Trade Agreement between Mexico, Canada and the United States concludes after 13 months of negotiations and achieves a beneficial scenario for the three countries.

Important bullets as a result of this negotiation limited to the energy sector:

• The outcome of an Energy Chapter that applies only to Mexico and a general wording that replaces the energy reserves that were prepared in TPP (Trans-Pacific Partnership) for the Cross-Border Trade in Services, Investment and Commercial Enterprises of the State chapters.
• The Chapter recognize the sovereign right to regulate and modify the Mexican legal framework, including the Constitution. As well reaffirms Mexico´s inalienable and impresciptible property on hydrocarbons in Mexico´s subsoil.
• The general wording establishes that Mexico reserves the right to adopt or maintain measures in sectors, sub-sectors or activities that are not reserved in the Annexes of Specific Provision on Cross-Border Trade in Services, Investment, and State- Owned Enterprises as long as these measures are consistent with the Mexico agreement that is least restrictive and that is already ratified upon the entry into force of NAFTA 2.0.

This provisions were included at Chapter 8 “Recognition of the Mexican State’s Direct, Inalienable, and Imprescriptible Ownership of Hydrocarbons” and in article 11 of Chapter 32 “Exceptions and General Provisions”.

Chapter 8.

Article 8.1: Recognition of the Mexican State’s Direct, Inalienable, and Imprescriptible

Ownership of Hydrocarbons.

1. As set out in this Agreement, the Parties confirm their full respect for sovereignty and their sovereign right to regulate with respect to matters addressed in this Chapter in accordance with their respective Constitutions and domestic laws, in the full exercise of their democratic processes.
2. In the case of Mexico, and without prejudice to their rights and remedies available under this Agreement, the United States and Canada recognize that:

(a)  Mexico reserves its sovereign right to reform its Constitution and its domestic legislation; and

(b)  The Mexican State has the direct, inalienable and imprescriptible ownership of all hydrocarbons in the subsoil of the national territory, including the continental shelf and the exclusive economic zone located outside the territorial sea and adjacent thereto, in strata or deposits, regardless of their physical conditions pursuant to Mexico’s Constitution.

Chapter 32.

Article 32.11: Specific Provision on Cross-Border Trade in Services, Investment, and State-Owned Enterprises and Designated Monopolies for Mexico.

With respect to the obligations in the Cross-Border Trade in Services, Investment, and State-Owned Enterprises and Designated Monopolies Chapters of this Agreement, Mexico reserves the right to adopt or maintain measures with respect to any sector and subsector for which Mexico has not taken a specific reservation in its Schedules to Annexes I, II, and IV of this Agreement, only to the extent consistent with the least restrictive measures that Mexico may adopt or maintain under the terms of applicable reservations and exceptions to parallel obligations in other trade and investment agreements that Mexico has ratified prior to entry into force of this Agreement, including the WTO Agreement, without regard to whether those other agreements have entered into force.

In accordance with the webpage of the Ministry of Economy of Mexico, the summary of such chapter is the following:

1. 1. Objective

• Guarantee full respect for Mexico’s sovereignty over oil and gas other hydrocarbons, through the recognition of their direct ownership, inalienable and imprescriptible on said resources.

2. 2. Mexico´s Objective

• Achieve full recognition of the sovereignty of Mexico and its capacity to reform the domestic legal framework, including the Constitution.
• Reaffirm the direct, inalienable and imprescriptible property of Mexico over oil and other hydrocarbons available in its territory.
• Establish mechanisms through which certainty can be provided legal assistance to service providers, exporters, importers and investors that currently participate in the energy sector.

3. Content

• The chapter recognizes the sovereign right of Mexico to regulate and modify its laws, including the Constitution. Likewise, the inalienable property is reaffirmed and imprescriptible on the hydrocarbons in the subsoil of Mexico.

4. Benefits for Mexico

• The independence and sovereignty of Mexico in energy matters is guaranteed.
• The right to regulate oil and other matters is preserved hydrocarbons, consistent with the commitments that Mexico has made in other international agreements.
• Legal certainty is provided, and the commitments assumed by
• Mexico with service providers, exporters, importers and investors that participate in the sector.

It is worth mentioning that these texts are published for informative purposes, may undergo additional modifications, are subject to legal review and are understood without prejudice to the final result of the agreement between the Parties.

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