Mexico's Energy Regime Reforms: Rescission Risk, Mitigation, and Dispute Resolution
Abstract
In July 2017, an international consortium of energy companies from the United States, Mexico, and the United Kingdom announced a significant crude oil discovery in shallow waters off the east coast of Mexico. This discovery is not only the fifth largest global oil discovery in the last five years and perhaps one of the top shallow-water fields discovered in the past twenty years, but, as “‘the first offshore exploration well drilled by the private sector in Mexico's history[,]”’ it has historical significance as well. This important find was made possible pursuant to recent landmark reforms to Mexico's energy legal regime that now allow foreign investors to participate in Mexico's energy sector. Prior to these reforms, Mexico's energy industry was among the most tightly controlled in the world, closely associated with national sovereignty. Indeed, many consider the Mexican petroleum expropriation of 1938 to be “the apogee of Mexican resource nationalism ... [and] a patriotic triumph” that is celebrated as Oil Expropriation Day, a national holiday, each March 18th.
Resource nationalism, sometimes expressed in its extreme form as expropriation, is a systemic risk for private international oil companies. Given the historical precedent in Mexico for the use of expropriation within the energy sector, and with the recent upsurge in expropriations of foreign-owned oil assets in Bolivia, Ecuador, Russia, and Venezuela, the Mexican government's approach to dispute resolution was a critical factor for foreign investors eager to take advantage of the Mexican energy reforms. While the reform package does authorize parties to exploration and production (E&P) contracts to agree upon alternative dispute resolution mechanisms, including arbitration, it also contains a controversial unilateral rescission exception that could greatly impact foreign investors.
This article will briefly review the history of oil production in Mexico and the governing legal regime in Part I, and in Part II, the recent reforms to that regime thereto. Part III will consider the reform's dispute resolution provisions and administrative rescission. Part IV will offer possible mechanisms by which foreign investors might mitigate the risk of administrative rescission to protect their investment in the Mexican energy sector. The final reflections of this article will focus upon the status and current success of Mexico's attempts to attract large international companies to invest significant amounts of capital and assets into Mexico's energy industry, despite concerns related to unilateral rescission.