Mexico’s discrimination highlights importance of trade deal

[Editor's note: This story originally was published by Real Clear Energy.]

By Gary Clyde Hufbauer

Real Clear Energy

When large firms with close ties to national governments use unfair practices to game the system, international trade rules should be invoked to restore fairness.

 That was the theme of a letter in June from the American Petroleum Institute (API) to U.S. Secretary of State Michael R. Pompeo and U.S. Trade Representative Robert Lighthizer. The letter detailed the gambits deployed by Petróleos Mexicanos (PEMEX), the Mexican government-owned energy giant, to keep near monopoly control by strong-arming energy markets. According API, “US investors are facing increasing difficulties getting permits for a range of activities, including new or re-branded stations, third party storage facilities, imported fuels, liquids terminals, and LNG terminals.”

In short, PEMEX, with the help of Mexican government officials, is doing everything it can to exclude foreign firms. That includes throwing up roadblocks to American companies seeking permits for new or rebranded gas stations, energy storage facilities, and liquefied natural gas terminals. According to officials, delays are now routine for permits that are supposed to be granted within 90 days and American gas companies have even seen their pumps shut down over minor infractions, often with coercion from the Mexican National Guard. To make matters worse, on July 1^st, 2020 – the day the USMCA entered into force – the Mexican government required American companies to keep five days’ worth of fuel storage, a Catch-22 rule since PEMEX owns the lion’s share of storage and Mexican officials block U.S. firms from building storage.

PEMEX clearly has much at stake. Today, it owns roughly 30 percent of all fuel stations in Mexico. Moreover, PEMEX officials have vowed to nearly double the company's drilling activity, even as the vast majority of the oil and gas firms have pulled back on exploration and production. In fact, Mexico stands alone in Latin America as the only nation to increase its rig count during the COVID-19 crisis.

American firms have much at stake, too. Mexico is the number one export market for U.S. finished motor gasoline, pipeline natural gas, and total refined products. Last year, the U.S. sent nearly two thirds of its gas exports, nearly 5 trillion cubic feet, to Mexico and Canada. Energy flows to our northern and southern neighbors support 12 million U.S. jobs and account for well over $1 trillion in trade.  PEMEX’s bid to maintain its monopoly is no excuse for official discrimination against US and other foreign firms.

These offenses highlight why faithful implementation of the United States-Mexico-Canada Agreement is so important. Mexico is engaging in exactly the type of mistreatment that USMCA was intended to address. Under USMCA rules, American companies that entered the Mexican market after that nation’s 2013 Energy Reforms should receive protections from the kind of discrimination detailed by American energy industry leaders. Using the USMCA framework, American investors can seek justice using the investor-state dispute settlement (ISDS) system, a mechanism built to adjudicate claims of discrimination against foreign investors.

While U.S. oil and gas firms certainly stand to benefit from the protections offered by the USMCA, Mexico has much to gain as well. Some 60 billion barrels of deep-water oil and 550 trillion cubic feet of shale gas lie within Mexico’s control. When the pandemic recedes and energy markets recover, foreign investment can help unlock this vast potential, but only if the Mexican government treats foreign firms fairly.

By insisting on faithful implementation of the USMCA, Secretary Pompeo and Ambassador Lighthizer, can ensure that U.S. energy firms are no longer victims of PEMEX maneuvers and, at the same time, do a real service for the Mexican economy.

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