The suspension of licensing rounds may have disappointed the private sector. But international treaties offer crucial protection against further unwinding of the country’s energy reforms
Mexico’s appetite for foreign investment has changed dramatically since the landmark energy reforms that began in late 2013. Bidding rounds opened the door to a wave of IOCs eager to participate in the country’s upstream, ending almost 80 years of state-controlled monopoly. But since the inauguration of President Andres Lopez Obrador in late 2018, operators have faced a very different government stance.
Licensing rounds, immediately frozen by Lopez Obrador, are still suspended and his administration remains critical of contracts previously signed with IOCs. Citing energy security concerns, the Lopez Obrador government has promised to maintain restrictions on future licensing rounds until operators significantly ramp up production from contracted blocks.
For concerned onlookers, unitisation discussions between Pemex and several IOCs are also critically important for foreign involvement in Mexico’s upstream. The national hydrocarbons commission is mediating disputes over operatorship and majority stakes in key offshore fields. Its decisions will likely have big implications for how aggressive the government could be in potentially rolling back Mexico’s reforms or even appropriating contracted fields.
Affording protection
But while foreign operators may feel uneasy about the government’s attitude towards the private sector, several ratified international treaties provide some important investor protection, according to a panel of experts on a PE Live webcast in early November.
“In my view, Mexico could not scale back the energy reforms in a manner which is consistent with its obligations under the USMCA” Rodriguez-Cortina, King & Spalding
In December 2018, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) trade agreement came into force, with Mexico the first of eight signatories. This year, the US-Mexico-Canada Agreement (USMCA) was also approved, replacing the existing North American Free Trade Agreement (Nafta). Mexico signed the multi-lateral treaty in April, and the agreement was fully ratified in July. The USMCA deal forms the second largest free-trade zone in the world after the EU, with the CPTPP in third place.
“In general terms, investors in the oil and gas industry continue to be protected today under investment treaties, the same way, or at least in a similar way, to which they were protected when the energy reforms were passed in late 2013,” explains Fernando Rodriguez-Cortina, senior associate at law firm King & Spalding.
“But the CPTPP maintains a more beneficial framework than the USMCA. The USCMA general framework of investment protection only includes protection against direct expropriation, excluding fair and equitable treatment and indirect expropriation, which are the standards more commonly invoked by investors,” says Rodriguez-Cortina.
He points out, however, that the oil and gas industry falls within an exception as a “covered industry” under the USMCA, meaning that, in addition to the general framework of investment protection under the agreement, the industry gets fair and equitable treatment and protection against indirect expropriation. Companies get the same protections afforded under the CPTPP, which is similar to Nafta but with certain limitations.
But to receive protection, investors and their affiliates, must be part of what the USMCA defines as a “covered government contract”. “Production sharing agreements, licences and other agreements with the National Hydrocarbon Commission, and other national authorities, would fall under this category,” says Rodriguez-Cortina.
Warning signs
One concern remains, though, that Mexico could yet amend its constitution to roll back the energy reforms. But Rodriguez-Cortina doubts the government would succeed even if there was enthusiasm to do so. “In my view, Mexico could not scale back the energy reforms in a manner which is consistent with its obligations under the USMCA,” he explains. “There has been some discussion as to whether Mexico is allowed under the USMCA to amend the constitution to repeal the energy reforms. Mexico would have the sovereign right to reform its constitution. However, they cannot make amendments in a way that would be inconsistent with their investment treaty obligations.”
A second point Rodriguez-Cortina highlights is that the CPTPP expressly mentions the energy reforms in one of its annexes. The conclusion is that Mexico will likely have difficulty making conditions more restrictive for investors while still bound to both treaties.
Rodriguez-Cortina does caution, however, that while the CPTPP and the USMCA treaties are likely to protect Mexico’s energy reforms for now, that does not mean the government’s stance will not impact existing and future investment decisions. “Investment treaties are great instruments that afford protection to investors, but they are certainly not insurance policies” he says. “Like in any dispute, there is no guarantee that you will prevail, and investors understand this. They have to weigh up all of the different factors to decide if they will continue to make new investments.”
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.
