EconomyFinancialChanges in the energy sector lead Mexico to the...

Changes in the energy sector lead Mexico to the top 5 of countries with the most international arbitrations

Mexico has crept into the ranking of the five countries with the most open arbitrations, according to a list by the International Chamber of Commerce Mexico (ICC). These legal processes, in which disputes are resolved in an international court, have coincided with the beginning of the regulatory changes made in the energy market.

Arbitrations remain private processes and the companies involved rarely reveal their existence and content, but the lawyers in the sector point to a greater use of the figure, to the constant modifications in the legal framework – which have also changed the dynamics between private parties. and changes in the way in which the state CFE and Pemex operate as the factors behind the boom in the beginning of these procedures.

Arbitration is agreed upon by the companies as a dispute resolution method from the signing of the contracts and is usually the last instance that the parties resort to to resolve a dispute, due to the high costs and the long time that the resolution takes. “This increase can really derive from a general trend in Mexico due to the use of arbitration, due to conflicts arising from the pandemic, and certainly due to regulatory changes in energy matters,” says Joaquín Vega, an expert partner in international arbitration at the firm Vega, Guerrero & Associates.

The most recent example of the use of these instruments is the beginning of consultations by the United States and Canada against the Mexican energy regulation. Although it is not yet an arbitration per se , if the parties do not reach an agreement, that would be the next step to clarify the disagreements.

Information from the ICC reveals that it was in 2021 when the use of arbitration by private companies against dependencies or agencies of the Mexican government began to be more frequent. In the list, Mexico is surpassed by the United States, Brazil, Spain and the United Arab Emirates.

The number of open procedures was not revealed by the agency and the list is not public. But, as a sign of the rise of these procedures, the state-owned CFE has said that up to the second quarter of the year, there were 24 of these processes opened in international courts, at the end of last year the figure was 21. Most have been initiated during this administration and mainly in the London Court of International Arbitration. The national electricity company has some open arbitrations with the Spanish Iberdrola –by and by one– and with some construction companies of seven gas pipelines awarded during the past six-year term.

In a count until the end of last year, the Mexican State added seven open investment arbitrations related to the energy market, which represent claims for more than 1,500 million dollars.

The sector’s lawyers were preparing for more of these procedures when the federal administration began with the most drastic changes to the electricity and oil markets, and when the constitutional reform was presented by President López Obrador. After that, the interviewees say, the companies have not ruled out the start of these processes, but the reason behind them will be focused more on individual cases, than on the macro changes made to the market.

“For the CFE and Pemex it was already something known, but I have noticed that there are more lawsuits in which they participate,” says Francisco Franco, a Baker McKenzie litigation lawyer. “It has not necessarily been the change in regulation, but because of a change in the different attitude regarding their contractual obligations.” The specialist points out that some of these processes have begun as a result of non-payment, cancellation of projects or changes to specific contracts.

For now, Mexico has two dispute notifications from US companies: Talos Energy and Monterra Energy. The first related to the Zama field, which Talos shares with Pemex, to which the Ministry of Energy granted the operation of the field, and the second related to the closure of operations of a fuel storage plant in Tuxpan.

Gabriela Álvarez, president of the Investment Arbitration Committee of the ICC Mexico, explains in an interview that although the changes in the energy market threaten to add more of these processes, they do not always involve the federal government. “A decision or a regulatory change of the Mexican State can have a certain effect that in the end causes a private party to breach a contract that has been signed with another private party, and then that leads to an arbitration demand,” he says.

The ICC has published a document, with data as of 2020, where it indicates that there are at least 20 open arbitration processes with the ICC rules where the two parties involved are Mexican companies. A year earlier, the agency recorded 13 similar cases. 2021 data is not yet available. And this number published by the agency only takes into account the cases that are being resolved under its rules, so the total number is even higher.

The ICC reveals another piece of information that accounts for the increase in this process in the country. The document details that until 2020 there were 78 public or private Mexican companies involved in these processes. A year earlier the number was 51. Mexico, says the ICC, has crept into the ranking of the 10 nations with the most parties involved in international arbitration and is second in Latin America, behind Brazil.

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