The Prospect for Further Energy Privatization in Mexico

Transcription

1 The Prospect for Further Energy Privatization in Mexico EWELL E. MURPHY, JR. SUMMARY I. EL PETRÓLEO ES NUESTRO...75 II. THE HISTORY III. THE ACTUALITY IV. THE AMBIGUITIES V. THE IRONIES VI. THE PROSPECT APPENDIX: A TIME-LINE OF MEXICAN ENERGY POLICY A. History of the Mexican Oil Expropriation B. From the Oil Expropriation to NAFTA C. NAFTA D. Developments During NAFTA E. Partial Bibliography I. EL PETRÓLEO ES NUESTRO What images flit through your mind when you think of the Mexican oil expropriation? Do you see President Lázaro Cárdenas somberly seated before a radio microphone at 10 o clock on that fateful Friday evening of March 18, 1938, commencing the announcement that shook the world? Do you view row after row of Mexican oil workers, marching in annual parades that commemorate the expropriation as a national holiday? Do you glimpse the voluptuous petroleum goddess, presiding in naked exuberance over Mexico City s magnificent monument to the expropriation? I see all three of those images, but what really sticks in my mind is a fourth image, souvenired from adolescent car trips across the dry, rocky landscape of Coahuila and Nuevo León during the early 1940s. There I would be, as empty of water as my car was of gas, praying desperately that the next turn in the endless road would reveal a fountain of miraculous liquids to slake each of our thirsts, when at last that fountain would appear: a PEMEX filling station! Retired partner in Houston of the law firm of Baker Botts, L.L.P.; B.A. 1946, LL.B. 1948, University of Texas at Austin; D.Phil. 1951, Oxford University, England. English translations from the original Spanish are by the author. 75

2 76 TEXAS INTERNATIONAL LAW JOURNAL [VOL. 36:75 They all looked alike. Each was a big shed with an extended roof over the drivethrough, fronted by a Mexican flag, the PEMEX logo, and an elderly pump whose tall glass dome calibrated a murky liquid of dubious octanes. What I remember best is the slogan of the expropriation. Sometimes it was printed on a cardboard poster in the window, occasionally it was painted across the entire facade, but it always made the same proud assertion: El petróleo es nuestro. The oil is ours. Those are the words we must start with if we would understand the cultural dynamics of the Mexican oil expropriation and the prospect, today, for further privatizating of the state monopolies it spawned. What is the petróleo that Mexico so proudly declares to be her own? What sovereignty does Mexico assert when she claims that petróleo to be nuestro? Seeking answers to those questions is a fascinating journey through the history, the actuality, the ambiguities, and the ironies of the energy industry of contemporary Mexico. II. THE HISTORY Oil exploration in Mexico began under the Mining Law of 1884, 1 which gave surface owners title to subsurface oil, and the Petroleum Law of 1901, which authorized oil concessions on public lands. 2 Private subsurface title was repudiated by Article 27 of the 1917 Constitution, which declared subsurface minerals to be the inalienable property of the Mexican nation. 3 A 1925 petroleum law 4 attempted to make oil operators renegotiate their subsurface titles and existing concessions into new, shorter-term concessions based on Article 27. The operators protested and achieved a 1928 amendment 5 of the 1925 petroleum law that confirmed existing concessions in accordance with their original terms. Meanwhile, the Mexican oil industry boomed from annual production of some 10,000 barrels in 1901 to more than 193,000,000 barrels in 1921, when Mexico was the second most productive oil country, producing one-fourth of the world s oil. 6 Over time, relations between the oil operators on the one hand, and oil workers and the Mexican government on the other, became increasingly acrimonious: labor disputes, tax disputes, claims of reservoir damage, and the like. This culminated in a general strike, which the government referred to a federal review board, whose award the oil operators refused to pay. At that point, President Cárdenas expropriated the defaulting companies and created Petróleos Mexicanos (PEMEX) to operate a state oil monopoly. 7 Notwithstanding its monopoly position, PEMEX continued to use private contractors and sometimes included percentages of production in exploration contracts as part of their compensation, but a 1958 law ended that practice with the rule (still in effect today) that contractors may be paid only in money Código de minería de la República Mexicana [ Mining Law of Mexico ], cited in HARRY K. WRIGHT, FOREIGN ENTERPRISE IN MEXICO 55, n.9 (1971). 2. See WRIGHT, supra note 1, at MEX. CONST. art See infra note 17 and accompanying text. 4. See Ley reglamentaria del artículo 27 constitucional, en el ramo del petróleo [ Law Regulating Constitutional Article 27 in the Petroleum Sector ], D.O., 31 de diciembre de See also WRIGHT, supra note 1, at See Reglamento de la ley del petróleo de 26 de diciembre de 1925 [ Regulation of the Petroleum Law of December 26, 1925 ], D.O., 8 de abril de 1926, cited in WRIGHT, supra note 1, at 64, n See GEORGE W. GRAYSON, THE POLITICS OF MEXICAN OIL 10 (1980). 7. See WRIGHT, supra note 1, at See Ley Reglamentaria del artículo 27 Constitucional en el Ramo del Petróleo [ Mexican Constitution, Article 27, Regulatory Law, Petroleum Branch ], D.O., 29 de noviembre de 1958.

3 2000] THE PROSPECT FOR FURTHER ENERGY PRIVATIZATION IN MEXICO 77 Mexico s state monopoly in electric energy was born less contentiously. Private producers and distributors entered the market first, but in 1937, President Cárdenas created the state-owned Comisión Federal de Electricidad (CFE) to serve less affluent consumers. 9 In 1960, by negotiated buy-outs of private electricity companies, President López Mateos transformed CFE into a state monopoly. 10 In 1992, the Salinas administration significantly diminished that monopoly by an amendment of the electric energy law that allows private enterprise (1) to generate electric energy for self-supply, co-generation, small production, sale to CFE, and emergency supply during interruption of public service; (2) to export electric energy so generated; and (3) to import electric energy for self-supply. 11 Consequently, CFE s monopoly is now reduced to what Article 27 of the Constitution calls public service. 12 In 1994 came the North American Free Trade Agreement (NAFTA), 13 which is a useful research tool for prospective U.S. and Canadian investors in the Mexican energy industry. By stating Mexico s energy reservations to the NAFTA s general obligations of access and protection for investment, the resulting text constitutes a precise and enforceable delineation of the scope of Mexico s state energy monopolies and related restrictions on foreign ownership in energy-related industries. Thus, instead of studying scores of overlapping and sometimes inconsistent Mexican statutes and regulations in their official Spanish, a lawyer can now examine fifteen pages or so of Mexican NAFTA reservations, expressed officially in English and French as well as Spanish, and achieve a good general understanding of what access her U.S. or Canadian client has to particular sectors of the Mexican energy industry. That is quite a boon. In 1995 came the great energy privatization of the Zedillo administration. The petroleum law was amended to allow concessions for private enterprise to transport, store, and distribute natural gas, and to build, operate, and own related pipelines and installations. 14 There followed two equally ambitious projects that, so far, have failed. One was the attempt to sell interests in secondary petrochemical plants to private investors. 15 That project collapsed in 1999, after a chaos of labor demonstrations, Congressional recriminations, restructurings, and reofferings that left on the auction block nothing private enterprise wanted to buy. The second failed project was President Zedillo s 1999 proposal, now dormant before the Mexican Congress, to amend the electric energy provisions of the Mexican Constitution to allow CFE to grant private concessions for public service operations. 16 III. THE ACTUALITY That brings us to the actuality, to the restrictions that exist today on investments by foreigners in Mexican energy industries. 9. See WRIGHT, supra note 1, at See id. at See Decreto que reforma, adiciona y deroga diversas disposiciones de la Ley del Servicio Público de Energía Eléctrica [ Decree which reforms, supplements and repeals various provisions of the Public Service of Electric Energy Law ], D.O., 23 de diciembre de See MEX. CONST., art North American Free Trade Agreement, Dec. 17, 1992, 32 I.L.M. 289 (1993). [hereinafter NAFTA] 14. See Decreto por el que se reforman y adicionan diversas disposiciones de la Ley Reglamentaria del Artículo 27 Constitucional en el ramo del petróleo [ Decree which reforms and supplements various provisions of the Regulatory Law of Article 27 in the area of Petroleum ], D.O., 11 de mayo de See OGJ Newsletter, OIL & GAS J., Sept. 13, 1999, at See Sam Dillon, Mexican Asks Privatization of Electricity, N.Y. TIMES, Feb. 4, 1999, at C5.

4 78 TEXAS INTERNATIONAL LAW JOURNAL [VOL. 36:75 The hard cores of those restrictions are the state monopolies themselves. As expressed in the Mexican Constitution, the state oil and gas monopoly means that the nation owns all subsurface minerals; 17 that, as to subsurface hydrocarbons, only the nation may exploit them, and neither concessions nor contracts in them may be granted; 18 and that the public sector is exclusively in charge of the strategic area of petroleum and other hydrocarbons and basic petrochemistry. 19 Constitutionally expressed, the state electric energy monopoly means that only the nation may generate, transmit, transport, distribute, or supply electric energy for the purpose of public service, 20 and the public sector is exclusively in charge of the strategic area of electricity. 21 Surrounding those hard cores of state monopoly are penumbras of exclusivity for Mexican investors. During the Salinas and Zedillo administrations those penumbras were significantly reduced. The 1973 foreign investment law reserved distribution of gas exclusively to Mexicans and limited foreign investment in secondary petrochemical products to 40% of an enterprise. 22 The corresponding restrictions of the 1993 foreign investment law 23 and its regulations list only (1) the complete exclusion of non-mexican investors in the retail sale of gasoline and distribution of liquefied petroleum gas; (2) a 49% ceiling on foreign ownership in the supply of fuel and lubricants for ships, aircraft, and railroad equipment; and (3) the requirement of Foreign Investment Commission approval for more than 49% foreign ownership in the drilling of oil and gas wells. 24 Outside those hard cores and penumbras, foreign enterprise is free to invest. IV. THE AMBIGUITIES Unfortunately, the energy provisions of the Mexican Constitution are replete with ambiguities. What does Article 27 mean, when regarding petroleum and solid, liquid, and gaseous hydrocarbons, it says that neither concessions nor contracts may be granted? If PEMEX could not grant contracts, it would implode. So decades of statutes and regulations have interpreted those ambiguous words to mean that, although PEMEX may contract with private parties for services, it may pay them only in money and in no case may include in the compensation a percentage of production or participation in the results of exploitation See MEX. CONST. art. 27 (amended 1998). 18. Id. 19. Id. arts. 25, 28 (amended 1998). 20. Id. art. 27 (amended 1998). 21. Id. arts. 25, 28 (amended 1998). 22. See Ley para Promover la Inversíon Mexicana y Regular la Inversíon Extranjera [ Law for Promoting Mexican Investment and for Regulating Foreign Investment ], D.O., 9 de marzo de See Ley de Inversíon Extranjera [ Mineral Law ], D.O., 27 de diciembre de 1993 (as amended by Decreto por el que se reforman, adicionan y derogan diversas disposiciones de la Ley Federal de Procedimiento Administrativo; de la Ley Federal sobre Metrología y Nomalización; de la Ley Minera; de la Ley de Inversión Extranjera; de la Ley General de Sociedades Mercantiles y del Código Civil para el Distrito Federal en materia común, y para toda la República en materia federal [ Decree that reforms, amends and repeals various provisions of the Federal Law of Adminstrative Procedure; of the Federal Law on Meteorology and Nominalization; of the Mineral Law; of the Law of Foreign Investment; of the General Law of Business Associations and of the Civil Code for the Federal District in common matter, and for all the Republic in federal matter ], D.O., 24 de diciembre de 1996). 24. See id. Article 8 of the 1993 foreign investment law listed a similar requirement for more than 49% foreign ownership in [c]onstruction of pipelines for the transportation of oil and derivative products, but Art. 2(I)c of the 1998 foreign investment regulations (referring to a corresponding amendment of the petroleum law) notes the deletion of that requirement. 25. E.g., Ley Reglamentaria del artículo 27 Constitucional en el Ramo del Petróleo [ Mexican Constitution, Article 27, Regulatory Law, Petroleum Branch ], D.O., 29 de noviembre de 1958.

5 2000] THE PROSPECT FOR FURTHER ENERGY PRIVATIZATION IN MEXICO 79 The NAFTA also took a stab at that, with results that are almost as ambiguous. A Mexican reservation to the NAFTA asserts that [r]isk-sharing contracts are prohibited, 26 but an obligatory provision of NAFTA commands that [e]ach [NAFTA nation] shall allow its state enterprises to negotiate performance clauses in their service contracts. 27 What does the Constitution mean when Article 27 says the nation will exploit oil and gas in the terms that the corresponding reglamentary law shall indicate, 28 and Article 28 identifies the corresponding strategic area simply as petroleum and other hydrocarbons? 29 Does that mean that, between the well-head and the consumer, a reglamentary law can fix the jurisdictional boundary of exploitation at any point between the well-head and the consumer as the Mexican Congress chooses, and open to private enterprise everything downstream of that point? What does Article 28 mean when it says basic petrochemistry is a strategic area of state monopoly? 30 Is basic petrochemistry a classification that must be deferred to petrochemical engineers, or may the Mexican Congress, or Mexican bureaucrats, decide? From the perspective of private enterprise, the authority to make that classification is like medieval alchemy because it can transform a petrochemical from basic lead to secondary gold. Mexico s official count of basic petrochemicals changes frequently, and since 1986 the count has moved from a high of fifty 31 to the present low of eight basic petrochemicals derived from oil and gas and a ninth from coal. 32 When it comes to interpreting the Mexican Constitution, alchemy is not a lost art! Those ambiguities of the Mexican Constitution are not inadvertent errors. They are deliberate blur-overs of passionate controversies of Mexican history. Resolving those controversies requires, not lawyerly quibbles or petrochemical analyses, but a profound soul-searching by the Mexican electorate concerning precisely what El petróleo es nuestro should mean. V. THE IRONIES The state energy monopolies founded on those ambiguous provisions of the Mexican Constitution are discredited by three factual ironies of the world in which the monopolies now exist: time, progeny, and place. The irony of time is the fact that human beings will eventually develop nonhydrocarbon energies that are not only renewable but are less costly and less pollutant than hydrocarbons. Some experts predict a sooner decline of hydrocarbon values, calculating that improved producer and consumer technologies alone will depress crude oil prices severely over the next two decades. 33 Anticipating such events, Mexico should focus its 26. NAFTA, supra note 13, Annex I, at 718, 724 (citing Article 27 of the Mexican Constitution, the Petroleum Law and Petroleum Regulations, and the Mexican Foreign Investment Law and Regulations). 27. NAFTA, supra note 61, Annex 602.3, at MEX. CONST. art. 27 (amended 1998). 29. Id. art MEX. CONST., art. 28 (amended 1998). 31. See Alejandro López-Velarde, Some Considerations with the New Foreign Investment Possibilities in the Mexican Oil and Gas Industry, 4 MEXICAN L. LIBR.: COM. CODES 31, 39 (Supp. 1997). ). See also GEORGE PHILIP, OIL & POLITICS IN LATIN AMERICA 201 (1982). 32. Reglamento de la Ley de Inversión Extranjera y del Registro Nacional de Inversiones Extranjeras [ Regulation of the Foreign Investment Law and of the National Registry of Foreign Investment ], D.O., 8 de septiembre de Cf. supra note 23 and accompanying text. 33. See Amy Myers Jaffe & Robert A. Manning, The Shocks of a World of Cheap Oil, 79 FOREIGN AFFAIRS 1, 16 (2000).

6 80 TEXAS INTERNATIONAL LAW JOURNAL [VOL. 36:75 efforts, not on preventing private enterprise from exploiting the Mexican subsoil, but on getting Mexican hydrocarbons discovered, produced, industrialized, and sold as quickly and profitably for Mexico as possible if at the expense of foreign investors, so much the better. The irony of progeny is the fact that, although most of the world s state-owned oil companies were created in the image of PEMEX, many of them have now abandoned PEMEX s exclusionist ways. Venezuela s state monopoly, PDVSA, makes profit-sharing joint ventures with private enterprise. 34 Argentina s former state monopoly, Y.P.F., has been privatized, and competes with other private companies for concessions. 35 Brazil s former state monopoly, Petrobras, has been partially privatized and conducts exploration in joint ventures with private companies. 36 Saudi Arabia s state monopoly, Aramco, has begun discussions with private companies concerning co-investments downstream. 37 All over the globe, state energy monopolies are opening up to private enterprise; but in exploration, production, and petrochemicals, Mexico is not joining the trend. As the Mexican Minister of Energy Luis Téllez recently admitted, Mexico is lagging behind because it has a model different from what is happening in the world. 38 The irony of place is Mexico s unique geographical location: joined by a thousand miles of border with the world s greediest consumer of hydrocarbons, the world s largest and boldest source of transnational hydrocarbon investment, and the world s most sophisticated creator and operator of hydrocarbon technologies. And the United States is not merely Mexico s neighbor; under the NAFTA, the United States is legally bound to Mexico by reciprocal commitments of access and protection for investment and the duty-free movement of goods. If Mexico searched the universe for the Utopia of a locked-in market for her hydrocarbons, an easily attracted source of investment to discover, produce, and industrialize those hydrocarbons within Mexico, and a wholesale price for the technology to do it, Mexico could not find a better Utopia than the one next door. Ironically, Mexico is not making effective use of her next-door Utopia. Instead of encouraging U.S. industry to buy more hydrocarbons from Mexico, Mexico frets that she is becoming too dependent on the U.S. crude oil market. 39 Instead of enticing U.S. oil operators to advance the risk-cost of discovering and producing those Mexican hydrocarbons, Mexico does it alone, with a consequent shrinking of her proven reserves from 69 to 40 billion barrels since the late 1980s. 40 Instead of motivating U.S. investors to industrialize those Mexican hydrocarbons within Mexico, Mexico is importing nearly $1 billion worth of gasoline and $1.2 billion worth of other refined products every year, 41 and 34. See Jay G. Martin, Privatization of Latin American Energy, 14 NAT. RESOURCES & ENV T 103, (1999). 35. See id. at See id. at We are looking for concepts that deal with integrated projects, which, as far as gas is concerned, will give us an end-product such as desalinated water power, or petrochemicals. OGJ Newsletter, OIL & GAS J., Feb. 15, 1999, at 3 (quoting Ali I. Naimi, Saudi Arabian Minister of Petroleum & Mineral Resources). 38. México se está quedando a la zaga [porque], tiene un modelo distinto de lo que está sucediendo en el mundo. [Mexico is lagging behind because it follows a different mode than what the world follows.] Fernando Ortega Pizarro, Se Despeja el Camino Hacia la Privatización de PEMEX [Clearing the Road for the Privatization of PEMEX], PROCESO, 19 de diciembre de 1999, at According to Mexican government statistics, the U.S.-bound portion of Mexican crude oil exports increased from 58.3% in 1992 to 77.6% (provisional figures) in See Instituto Nacional de Estadística, Geografía e Informática, Estructura del Volumen de las Exportaciones de Crudo por Destino Geográfico, EL SECTOR ENERGÉTICO EN MÉXICO 192 (1998) [National Institute of Statistics, Geography and Information, The Volume Structure of Exported Oil by Geographic Destination, THE ENERGY SECTOR IN MEXICO]. 40. See Rogelio Ramirez de la O, Mexico Must Change its Oil Industry or Face a Crisis, HOUSTON CHRON., Aug. 27, 1999, at A See id.

7 2000] THE PROSPECT FOR FURTHER ENERGY PRIVATIZATION IN MEXICO 81 in 1998, imported 38% of her petrochemical consumption at a cost of $7.158 billion. 42 In the words of a recent analysis, PEMEX... is a major source of government revenue and national pride, but its resistance to outside investment and privatization is creating an industry of aging equipment, outdated technology, and stagnant production levels. 43 VI. THE PROSPECT That is the history and the actuality, and those are the ambiguities and the ironies, of the Mexican energy industry. They teach us the contemporary meaning of the slogan, El petróleo es nuestro : two hard cores of state monopoly and small surrounding penumbras of exclusivity for Mexican investors. And they suggest that, although the penumbras may continue to shrink, there is little short-term prospect for diminishing the hard cores further. When President Salinas narrowed the state electricity monopoly, and President Zedillo removed gas distribution from the state oil and gas monopoly, their political party controlled both houses of the Mexican Congress. In the 1997 elections, that party lost control of the Lower House; subsequently, President Zedillo was not able to increase the allowed percentage of foreign ownership in secondary petrochemicals, or to obtain a constitutional amendment to privatize public service in electricity. The 2000 elections produced a new President, Vicente Fox, whose party is a minority in each House. Thus far, Mr. Fox s announced energy plans have included increasing the allowed percentage of foreign investment in secondary petrochemicals, 44 but not any major privatization, such as President Zedillo s failed proposal for public service electricity, that would require constitutional amendment. Viewed in the broad context of Mexican history, the resulting hiatus in Mexican energy privatization may nonetheless prove to be a constructive interlude. The electricity and gas privatizations of the Salinas and Zedillo administrations were components of a radical reorientation of the Mexican economy that created huge new private industries, which Mexico must now learn to regulate: banks, long-distance telephone service, satellite communications, railways, toll highways, the management of airports and seaports, and now the generation and private sale of electricity and the distribution of gas. Those are not ordinary industries. Virtually every one of them requires vigilant government oversight at both ends to ensure reasonable returns to suppliers and fair prices to consumers; many involve unpopular downsizing of heavily unionized payrolls. Regulating those industries would be a difficult task for any nation. For Mexico, which has little experience in impartial and efficient industrial regulation, it is a formidable task indeed. As an OECD survey concluded, Liberalization in the provision of public services will require a long gestation period, in order for Mexican regulatory bodies to acquire the necessary skills, drawing on international experience. Up to now, Mexican authorities have indeed been rather timid in this domain Mayela Córdoba, Sin resolver, problemas estructurales de petroquimica [Unresolvable: Structural Problems of the Petrochemcial Industry], EL ECONOMISTA, 20 de septiembre de 1999, at MICHAEL J. MAZARR, MEXICO 2005: THE CHALLENGES OF THE NEW MILLENNIUM 19 (1999). 44. See Mexico May Lift Chemical-Plant Ownership Limit, HOUSTON CHRON., Aug. 25, 2000, at C Organization for Economic Co-Operation and Development, Mexico, 1995 OECD ECONOMIC SURVEYS 82. See also the subsequent OECD survey of Mexico, which, after analyzing the privatizations Mexico had begun, concluded that to reap the full benefits from the ongoing reform process, it is necessary that the authorities move ahead with the existing plans, broaden the scope of reform, and carefully oversee the implementation stage. Organization for Economic Co-Operation and Development, Mexico, 1999 OECD ECONOMIC SURVEYS 131.

8 82 TEXAS INTERNATIONAL LAW JOURNAL [VOL. 36:75 For those reasons, the year 2000 may be a useful time for privatization of the Mexican energy industry to enjoy a well-earned holiday. Economically, Mexico needs more energy privatization, but culturally and politically her deeper and more immediate need is a bit of breathing space in which to adjust to the privatizations now being implemented and to thoughtfully reconsider what that proud old slogan, El petróleo es nuestro, should mean in the wiser Mexico of the new millennium.

9 2000] THE PROSPECT FOR FURTHER ENERGY PRIVATIZATION IN MEXICO 83 APPENDIX: A TIME-LINE OF MEXICAN ENERGY POLICY A. History of the Mexican Oil Expropriation 1884 A federal mining law gave surface owners title to subsurface oil A federal mining law declared ownership of mineral property irrevocable and perpetual A law authorized the Mexican government to grant oil concessions on public lands A mining law reaffirmed the subsoil rights of surface owners With foreign investment from mostly U.K./Dutch and U.S. sources Mexican oil 1921 production increased from 10,000 barrels in 1901 to 193,400,000 barrels in By 1921, one-fourth of the world s oil production came from Mexico, and Mexico ranked as the second leading oil-producing country in the world Mexico adopted a new Constitution, 52 Article 27 of which stated that the Mexican nation owned the Mexican subsoil A petroleum law limited the term of existing concessions to fifty years. 54 U.S. companies complained that the 1925 law was an ex post facto diminution of their concession terms, and asked the U.S. government to intervene, but by a vote of seventy-nine to zero the U.S. Senate recommended that international arbitration settle the matter Petroleum regulations implemented the 1925 Petroleum Law The 1925 Petroleum Law was amended to eliminate its ex post facto diminution of terms of existing concessions. The law confirmed all concessions granted before the 1917 Constitution in accordance with their original terms Código de minería de la República Mexicana [ Mining Code of Mexico ], cited in HARRY K. WRIGHT, FOREIGN ENTERPRISE IN MEXICO 55, n.9 (1971) [hereinafter Mining Law of 1884]. 47. Ley minería y ley de impuesto a la minería [ Mining Law and Mining Tax Law ], D.O., 7 de junio de 1892, cited in WRIGHT, supra note 1, at 55, n See GEORGE W. GRAYSON, THE POLITICS OF MEXICAN OIL 9 (1980). See also WRIGHT, supra note 46, at See GRAYSON, supra note 48, at See id. at See WRIGHT, supra note 46, at See Constitución Política de los Estados Unidos Mexicanos, que Reforma la de 5 de Febrero de 1857 [ Mexican Constitution that Reforms the Constitution of February 5, 1857 ], D.O., 5 de febrero de See Alejandro López-Velarde, Some Considerations with the New Foreign Investment Possibilities in the Mexican Oil and Gas Industry, 4 MEXICAN L. LIBR.: COM. CODES 31, 39 (Supp. 1997) [hereinafter Alejandro López-Velarde, Some Considerations]. See also GEORGE PHILIP, OIL & POLITICS IN LATIN AMERICA 201 (1982). 54. See Ley reglamentaria del artículo 27 constitucional, en el ramo del petróleo [ Law Regulating Constitutional Article 27 in the Petroleum Sector ], D.O., 31 de diciembre de See also WRIGHT, supra note 46, at See PHILIP, supra note 53, at See Reglamento de la ley del petróleo de 26 de diciembre de 1925 [ Regulation of the Petroleum Law of December 26, 1925 ], D.O., 8 de abril de 1926, cited in WRIGHT, supra note 1, at 64, n See Decreto que reforma los artículos 14 y 15 de la Ley Reglamentaria del artículo 27 constitucional, en el Ramo de Petróleo [ Decree Reforming Articles 14 and 15 of the Law Regulating Constitutional Article 27 in the Petroleum Sector ], D.O., 10 de enero de See also WRIGHT, supra note 46, at 65, 126.

10 84 TEXAS INTERNATIONAL LAW JOURNAL [VOL. 36: President Cárdenas created the Federal Electricity Commission (CFE) to compete with private producers of electricity Over the years, friction in the form of labor troubles, tax disputes, claims of reservoir damage, etc. developed between oil companies and the Mexican government. There was a general oil workers strike, which the Mexican government referred to a federal labor board, which awarded the workers a pay increase. After the oil companies refused to pay the awarded pay increase, President Cárdenas expropriated the major foreign-owned companies on March 18, Pemex was created. 60 B. From the Oil Expropriation to NAFTA 1940 Article 27 of the Mexican Constitution was amended to prohibit the granting of hydrocarbon concessions. 61 A new Petroleum Law implemented Article 27 of the Mexican Constitution as so amended Superseding the 1940 law, a new Petroleum Law recognized confirmatory concessions granted under the 1928 amendment of the 1925 Petroleum Law Accepting the recommendation of a joint Mexican-United States settlement commission, Mexico agreed to pay uncompensated U.S. oil companies expropriation compensation of approximately U.S.$24 million, plus interest, over ten years A presidential decree (subsequently amended many times) limited foreign investment in specified sectors Mexico agreed to pay Shell, the major U.K./Dutch company, expropriation compensation of $81.25 million, plus interest, over 15 years Superseding the 1941 law, a new petroleum law: Confirmed that direct, inalienable, and imprescriptible ownership of all hydrocarbons found in national territory belongs to the nation See WRIGHT, supra note 46, at See id. at See Mining Law of 1884, supra note 46. See also WRIGHT, supra note 46, at Ley Reglamentaria del Artículo 27 en Materia de Petróleo [ Law Regulating Article 27 Regarding Petroleum ], D.O., 9 de noviembre de See also WRIGHT, supra note 46, at See Ley Reglamentaria del Artículo 27 en Materia de Petróleo [ Law Regulating Article 27 Regarding Petroleum ], D.O., 9 de noviembre de See also Alejandro López-Velarde, Some Considerations, supra note See Ley Reglamentaria del Artículo 27 Constitucional, en el Ramo del Petróleo [ Law Regulating Constitutional Article 27 in the Petroleum Sector ], D.O., 18 de junio de See also WRIGHT, supra note 46, at See WRIGHT, supra note 46, at 72. One U.S. company, Sinclair, had previously settled for U.S.$8.5 million. 65. See Decreto que establece la necesidad transitoria de obtener permiso para adquirir bienes a extranjeros, y para la constitución o modificación de sociedades mexicanas que tengan o tuvieren socios extranjeros [ Decree Establishing the Transitory Need for Foreigners to Obtain Permission to Acquire Property, and for the Constitution or Modification of Mexican Companies that Have or Had Foreign Partners ], D.O., 7 de julio de See also WRIGHT, supra note 46, at See WRIGHT, supra note 46, at See Ley Reglamentaria del Artículo 27 Constitucional en el Ramo del Petróleo [ Law Regulating Constitutional Article 27 in the Petroleum Sector ], D.O., 29 de noviembre de 1958.

11 2000] THE PROSPECT FOR FURTHER ENERGY PRIVATIZATION IN MEXICO 85 Stated that only the nation may conduct the petroleum industry and would do so through Pemex. 68 Defined the petroleum industry to include (1) the exploration, exploitation, refining, transportation, storage, distribution, and initial sale of petroleum, gas, and the products obtained by refining them, (2) the manufacture, storage, transportation, distribution, and initial sale of artificial gas, and (3) the manufacture, storage, transportation, distribution, and initial sale of the derivatives of petroleum that may be used as basic industrial raw materials. 69 Stated that Pemex could contract with private parties for services, but required the remuneration provided in such contracts always to be in cash, and in no case to include percentages of products or participation in the results of exploitations. 70 (During the late 1940s and early 1950s, Pemex granted exploration contracts that included percentages of production as part of contractors compensation. 71 Such contracts were permissible under the 1940 and 1941 Petroleum Laws, but became illegal under the 1958 Petroleum Law) New petroleum regulations implemented the 1958 Petroleum Law by detailing Pemex s monopoly position in specific sectors of the hydrocarbons industry President López Mateos nationalized by means of agreed purchase all remaining private producers of electricity, transforming the production of energy for sale to the public into a state monopoly under the CFE. 74 Article 27 of the Mexican Constitution was amended to terminate existing hydrocarbon concessions and to make more explicit the state monopolies in hydrocarbons and electric energy. Regarding state energy monopolies, the result was the following language of Article 27 in its present form: (1) [Hydrocarbons:] To the Nation belongs direct dominion over... solid combustible minerals; petroleum and all hydrocarbons, solid, liquid or gas.... [T]he dominion of the Nation is inalienable and imprescriptible.... Regarding petroleum and solid, liquid or gas hydrocarbons or radioactive minerals, neither concessions nor contracts will be granted, nor will those that have been granted continue, and the Nation will conduct exploitation of those products, in the terms that the corresponding regulatory law shall indicate See id. 69. See id. 70. See id. 71. See WRIGHT, supra note 46, at See Rogelio López-Velarde, Mexico s New Petroleum Law: The Internal Reforms at Pemex and the North American Free Trade Agreement, 28 INT L LAW. 1, 10 (1994) [hereinafter Rogelio López-Velarde, Mexico s New Petroleum Law]. 73. See Reglamento del Artículo 27 Constitucional en el Ramo del Petróleo [ Regulations of Constitutional Article 27 in the Petroleum Sector ], D.O., 25 de agosto de See also WRIGHT, supra note 46, at See WRIGHT, supra note 46, at ARTÍCULO ÚNICO: Se reforman los párrafos cuarto, quinto, sexto y septimo fracción I del artículo 27 y los artículos 42 y 48 de la Constitución Política de los Estados Unidos Mexicanos [ SOLE ARTICLE: Reformation of Paragraphs Four, Five, Six, and Part One of Seven of Article 27 and Articles 42 and 48 of the Mexican Constitution ], D.O., 20 de enero de The original Spanish of art. 27 reads: Corresponde a la Nación el dominio directo de... los combustibles minerales sólidos; el petróleo y todos los carburos de hidrógeno sólidos, líquidos o gaseosos.... [E]l dominio de la Nación es inalienable e imprescriptible.... Tratándose del petróleo y de los carburos de hidrógeno sólidos, líquidos o gaseosos..., no se otorgarán concesiones ni contratos, ni subsistirán los que en su caso se

12 86 TEXAS INTERNATIONAL LAW JOURNAL [VOL. 36:75 (2) [Electric energy:] The generation, transmission, transportation, distribution and supply of electric energy for the purpose of public service corresponds exclusively to the Nation. In this subject matter concessions will not be granted to private parties, and the Nation will make use of the goods and natural resources that may be required for such purposes. 76 A regulation prohibited foreign investment in the distribution of liquefied petroleum gas The Pemex Organic Law superseded the formative decree of Petrochemical regulations detailed Pemex s position in petrochemicals, including: (1) The exclusive right of Pemex to conduct the processing of products that can serve as basic industrial prime materials, that may be the result of petrochemical processes based on the first important chemical transformation or in the first important physical process that is performed, from products or sub-products of refining or from natural petroleum hydrocarbons. 79 (2) The requirement of prior approval by the Ministry of National Patrimony for the processing, by others, of certain refinery products Regulations to the Pemex Organic Law were issued A foreign investment law listed: (a) Among activities reserved exclusively to the State: 82 hayan otorgado y la Nación llevará a cabo la explotación de esos productos, en los términos que señale la ley reglamentaria respectiva. See also Decreto que declara adicionado el párrafo sexto del Artículo 27 de la Constitución Política de los Estados Unidos Mexicanos [Decree Declaring the Addition of Paragraph Six of Article 27 of the Mexican Constitution], D.O., 29 de diciembre de See WRIGHT, supra note 46, at Decreto que declara adicionado el párrafo sexto del Artículo 27 de la Constitución Política de los Estados Unidos Mexicanos [ Decree that Declares the addition of Paragraph Six of Article 27 of the Mexican Constitution ], D.O., 29 de diciembre de The original Spanish of art. 27 reads: Corresponde exclusivamente a la Nación general, conducir, transformar, distribuir y abastecer energía eléctrica que tenga por objeto la prestación de servicio público. En esta materia no se otorgarán concesiones a los particulares y la Nación aprovechará los bienes y recursos naturales que se requieran para dichos fines. See also WRIGHT, supra note 46, at See ARTÍCULO ÚNICO: Se reforman los párrafos cuarto, quinto, sexto y septimo fracción I del Artículo 27 y los Artículos 42 y 48 de la Constitución Política de los Estados Unidos Mexicanos [ SOLE ARTICLE: Reformation of Paragraphs Four, Five, Six, and Part One of Seven of Article 27 and Articles 42 and 48 of the Mexican Constitution ], D.O., 20 de enero de 1960; Decreto que declara adicionado el párrafo sexto de Artículo 27 de la Constitución Política de los Estados Unidos Mexicanos [ Decree Declaring the Addition of Paragraph Six of Article 27 of the Mexican Constitution ], D.O., 29 de diciembre de See also WRIGHT, supra note 46, at See Ley Orgánica de Petróleos Mexicanos [ Pemex Organic Law ], D.O., 6 de febrero de Reglamento de la Ley Reglamentaria del Artículo 27 Constitucional en el Ramo del Petróleo, en Materia de Petroquímica [ Regulations of the Law Regulating Constitutional Article 27 in the Petroleum Sector Regarding Petrochemicals ], D.O., 9 de febrero de The original Spanish reads: La elaboración de los productos que sean susceptibles de servir como materias primas industriales básicas, que sean resultado de los procesos petroquímicos fundados en la primera transformación química importante o en el primer proceso físico importante que se efectúe a partir de productos o subproductos de refinación, o de hidrocarburos naturales del petróleo. 80. See id. 81. See Reglamento de La Ley Orgánica de Petróleos Mexicanos [ Regulations of the Pemex Organic Law ], D.O., 10 de agosto de 1972.

13 2000] THE PROSPECT FOR FURTHER ENERGY PRIVATIZATION IN MEXICO 87 (1) Petroleum and other hydrocarbons ( Petróleo y los demás hidrocarburos ). (2) Basic petrochemicals ( Petroquímica básica ). (3) Electricity ( Electricidad ). (b) Among activities reserved exclusively to Mexicans: 83 (c) Distribution of gas ( Distribución de gas ). Among activities in which foreign ownership was allowed: Secondary petrochemical products ( Productos secundarios de la industria petroquímica ): foreigners could own no more than 40% of an enterprise The Electric Energy Public Service Law (Electric Energy Law) authorized CFE to operate the state monopoly of electric energy for public service. 85 The Electric Energy Law has been amended frequently The amended Petroleum Law specified Pemex s right of eminent domain Articles 25 and 28 of the Constitution were amended to authorize various state monopolies. 88 Regarding state energy monopolies, the result was the following language of Articles 25 and 28 in their present form: 89 Art. 25: The public sector will be in exclusive charge of the strategic areas indicated in Article 28, Paragraph Art. 28: Lists petroleum and other hydrocarbons, basic petrochemicals, and electricity among strategic areas in which exclusive functions of the state will not constitute an illegal monopoly Ley Para Promover la Inversión Mexicana y Regular la Inversión Extranjera [ Law Promoting Mexican Investment and Regulating Foreign Investment ], D.O., 9 de marzo de Id. 84. Id. 85. See Ley del Servicio Público de Energía Eléctrica [ Electric Energy Public Service Law ], D.O., 22 de diciembre de See, e.g., Decreto por el que se reforma la Ley del Servicio Público de Energía Eléctrica [ Decree Reforming the Electric Energy Public Service Law ], D.O., 27 de diciembre de 1983; Decreto que reforma, adiciona y deroga diversas disposiciones de la Ley del Servicio Público de Energía Eléctrica [ Decree Reforming, Adding, and Repealing Various Provisions of the Electric Energy Public Service Law ], D.O., 23 de diciembre de 1992; Decreto que reforma, adiciona, y deroga disposiciones de diversas leyes relacionadas con el Tratado de Libre Comercio de América del Norte [ Decree Reforming, Adding, and Repealing Various Laws Related to the North American Free Trade Agreement ], D.O., 22 de diciembre de See Decreto de reforma a los Artículos 7 y 10 de la Ley Reglamentaria del Artículo 27 Constitucional en el Ramo del Petróleo [ Decree Which Reforms Articles 7 and 10 of the Law Regulating Constitutional Article 27 in the Petroleum Sector ], D.O., 30 de diciembre de See Alejandro López-Velarde, Some Considerations, supra note 53, at CONSTITUCIÓN POLÍTICA DE LOS ESTADOS UNIDOS MEXICANOS arts. 25, 28 (amended 1998) [hereinafter MEX. CONST.]. 90. Id. art 25. The original Spanish reads: El sector público tendrá a su cargo, de manera exclusiva, las áreas estratégicas que se señalen en el artículo 28, párrafo cuarto de la Constitución. 91. Id. art. 28. The original Spanish reads: No constituirán monopolios las funciones que el Estado ejerza de manera exclusiva en las áreas estratégicas a las que se refiere este precepto:... petróleo y los demás hidrocarburos; petroquímica básica... electricidad... y las actividades que expresamente señalen las leyes que expidan el Congreso de la Unión.

14 88 TEXAS INTERNATIONAL LAW JOURNAL [VOL. 36: By protocol of accession, Mexico committed to join the General Agreement on Tariffs and Trade (GATT) New foreign investment regulations listed: 93 (a) (b) (c) (d) (e) Among activities reserved exclusively to the State: (1) Extracting petroleum and natural gas ( Extracción de Petróleo y Gas Natural ). (2) Manufacturing basic petrochemical products ( Fabricación de Productos Petroquímicos Básicos ). (3) Refining petroleum ( Refinación de Petróleo ). (4) Generating and transmitting electric energy ( Generación y Transmisión de Energía Eléctrica ). (5) Supplying electric energy ( Suministro de Energía Eléctrica ). Among activities reserved exclusively to Mexican Nationals: Retail trade in liquefied petroleum gas ( Comercio al pormenor de gas licuado combustible ). Among activities in which foreign ownership was allowed but limited to specified percentages: Manufacture of secondary petrochemical products ( Fabricación de productos petroquímicos secundarios ) foreigners could own no more than 40% of an enterprise. Among activities requiring Foreign Investment Commission approval for majority ownership by foreigners: (1) Construction of electricity generating plants ( Construcción de Plantas de Generación de Electricidad ), construction and installation of lines and systems for electricity transmission ( Construcción y Tendido de Líneas y Redes de Conducción Eléctrica ), and construction for transport of oil and derivatives ( Construcción para la Conducción de Petróleo y Derivados ). (2) Drilling of oil and gas wells ( Perforación de Pozos Petroleros y de Gas ). Among activities in which, with Foreign Investment Commission approval, foreign investors could invest through trusts: (1) Distribution of gas ( Distribución de gas ). (2) Secondary petrochemical products ( Productos secundarios de la industria petroquímica ) A decree of the Ministry of Energy, Mines and State Industry amended the 1971 Petrochemical Regulations to allow private enterprise to process certain refinery products without prior government approval See Gerald D. Prager, Pemex at the Crossroads: A National Oil Industry in Crisis, 15 HOUS. J. INT L L. 115, 145 (1992). 93. Reglamento de la Ley para Promover la Inversión Mexicana y Regular la Inversión Extranjera, [ Regulations of the Law to Promote Mexican Investment and to Regulate Foreign Investment ], D.O., 16 de mayo de Of those industry classifications, groups (a) through (c) appear in an unnumbered addendum of the 1989 foreign investment regulations, and group (d) appears in its art. 23, which refers to classifications established in the 1973 Foreign Investment Law.

15 2000] THE PROSPECT FOR FURTHER ENERGY PRIVATIZATION IN MEXICO Superseding the 1971 Act, a new Pemex Organic Law restructured Pemex to include four decentralized entities, of which three (Pemex Exploración y Producción, Pemex Refinación, and Pemex Gas y Petroquímica Básica) would conduct strategic activities ( actividades estratégicas ) and the fourth (Pemex Petroquímica) would process, store, distribute and market products that are not part of the basic petrochemical industry ( no forman parte de la industria petroquímica básica ). 95 A publication of Pemex s legal department explained the 1992 Organic Law in part as follows: In the past few years the technological dynamics of the petrochemical industry have made it necessary to reclassify various basic products as secondary petrochemicals (as listed in the law); therefore, a good portion of the plants and products presently manufactured by Petróleos Mexicanos are now classified as secondary petrochemicals. Thus, the creation of Pemex Petrochemicals responds to the need of the institution to be allowed to compete in domestic and international markets under better conditions. 96 The Electric Energy Law was amended to exclude from public service (and thereby open to private enterprise) (1) the generation of electric energy for selfsupply, co-generation, small production, sale to CFE, and emergency supply, (2) the exportation of electric energy so generated, and (3) the importation of electric energy for self-supply New electric energy regulations were issued. 98 A resolution fixed rules for foreign investment in electric energy. 99 The Energy Regulatory Commission (CRE) was created. 100 The Ministry of Energy, Mines and State Industry was reorganized. 101 The Pemex Organic Law and the Electric Energy Law were amended to allow Pemex and CFE to agree to the application of foreign law and to the jurisdiction of 94. See Decreto que reforma el Artículo 11 del Reglamento de la Ley Reglamentria del Artículo 27 Constitucional en el Ramo del Petróleo, en Materia de Petroquímica [ Decree Reforming Article 11 of the Regulations of the Law Regulating Constitutional Article 27 in the Petroleum Sector Regarding Petrochemicals ], D.O., 8 de enero de Ley Orgánica de Petróleos Mexicanos y Organismos Subsidarios [ Organic Law of Pemex and Subsidiaries ], D.O., 16 de julio de PETRÓLEOS MEXICANOS, ORGANIC ACT OF PETRÓLEOS MEXICANOS, SUBSIDIARY ENTITIES AND EXPLANATION OF REASONS 7 (1993). 97. See Decreto que reforma, adiciona y deroga diversas disposiciones de la Ley del Servicio Público de Energía Eléctrica [ Decree Reforming, Adding, and Repealing Various Provisions of the Electric Energy Public Service Law ], D.O., 23 de diciembre de See Reglamento de la Ley del Servicio Público de Energía Eléctrica [ Regulations of the Electric Energy Public Service Law ], D.O., 31 de mayo de See RESOLUCIÓN general número 5 que establece las reglas para la participación de la inversión extranjera en las actividades del sector de energía eléctrica, que no constituyen servicio público [ General Resolution Number Five Establishing Rules for Foreign Investment in Electric Energy Activities that Do Not Constitute Public Service ], D.O., 22 de septiembre de See Decreto por el que se crea la Comisión Reguladora de Energía como un órgano administrativo desconcentrado de la Secretaría de Energía, Minas e Industria Paraestatal [ Decree Creating the Energy Regulatory Commission as an Administrative Entity Separate from the Ministry of Energy, Mines, and State Industry ], D.O., 4 de octubre de See Decreto que se reforma, adiciona y deroga disposiciones del Reglamento Interior de la Secretaría de Energía, Minas e Industria Paraestatal [ Decree Reforming, Adding, and Repealing Provisions of the Internal Regulations of the Ministry of Energy, Mines, and State Industry ], D.O., 25 de noviembre de 1993.

16 90 TEXAS INTERNATIONAL LAW JOURNAL [VOL. 36:75 foreign courts and arbitral tribunals, in juridical acts of an international character ( actos jurídicos de carácter internacional ). 102 A resolution allowed foreign investment in electric power, but not for sale to the public. 103 A new foreign investment law listed: (a) (b) (c) (d) Among strategic areas reserved exclusively to the State: (1) Oil and other hydrocarbons ( Petróleo y demás hidrocarburos ). (2) Basic petrochemicals ( Petroquímica básica ). (3) Electricity ( Electricidad ). 104 Among activities in which no foreign investment was allowed: retail sale of gasoline and distribution of liquefied petroleum gas ( Comercio al por menor de gasolina y distribución de gas licuado de petróleo ). 105 Among activities in which foreign ownership was limited to fixed percentages: Supply of fuel and lubricants for ships, aircraft and railroad equipment ( Suministro de combustible y lubricantes para embarcaciones, aeronaves y equipo ferroviario ): foreign ownership limited to 49%. 106 Among activities in which Foreign Investment Commission approval was required for more than 49% foreign ownership: (1) Construction of pipelines for the transportation of oil and oil derivatives ( Construcción de ductos para la transportación de petróleo y sus derivados ). (2) Drilling of oil and gas wells ( Perforación de pozos petroleros y de gas ). 107 C. NAFTA 1994 NAFTA took effect January 1, Among Mexican reservations to its promises of access for services and investment are these provisions regarding energy: Annex Reservations and Special Provisions [to Chapter Six, Energy and Basic Petrochemicals] Reservations 102. Decreto que reforma, adiciona y deroga disposiciones de diversas leyes relacionadas con el Tratado de Libre Comercio de América del Norte [ Decree Reforming, Adding, and Repealing Provisions of Laws Related to the North American Free Trade Agreement ], D.O., 22 de diciembre de See RESOLUCIÓN general número 5 que establece las reglas para la participación de la inversión extranjera en las actividades del sector de energía eléctrica, que no constituyen servicio público [ General Resolution Number Five Establishing Rules for Foreign Investment in Electric Energy Activities that Do Not Constitute Public Service ], D.O., 22 de septiembre de Ley de Inversión Extranjera [ Foreign Investment Law ], D.O., 27 de diciembre de Id Id Id North American Free Trade Agreement, Dec. 17, 1992, 32 I.L.M. 289 (1993) [hereinafter NAFTA].

17 2000] THE PROSPECT FOR FURTHER ENERGY PRIVATIZATION IN MEXICO The Mexican State reserves to itself the following strategic activities, including investment in such activities and the provision of services in such activities: (a) (b) (c) exploration and exploitation of crude oil and natural gas; refining or processing of crude oil and natural gas; and production of artificial gas, basic petrochemicals, and their feedstocks and pipelines; foreign trade; transportation, storage and distribution, up to and including the first hand sales of the following goods: (i) (ii) crude oil, natural and artificial gas, (iii) goods covered by [Chapter Six] obtained from the refining or processing of crude oil and natural gas, and (iv) basic petrochemicals; the supply of electricity as a public service in Mexico, including except as provided in paragraph 5 the generation, transmission, transformation, distribution, and sale of electricity. 2. [P]rivate investment is not permitted in the activities listed in the first paragraph. [NAFTA s provisions for access of services] shall only apply to activities involving the provision of services covered in the first paragraph when Mexico permits a contract to be granted in respect of such activities and only to the extent of that contract. Trade in Natural Gas and Basic Petrochemicals 3. Where end-users and suppliers of natural gas or basic petrochemical goods consider that cross-border trade in such goods may be in their interests, each Party shall permit such end-users and suppliers, and any state enterprise of that Party as may be required under its domestic law, to negotiate supply contracts. Each Party shall leave the modalities of the implementation of any such contract to the end-users, suppliers, and any state enterprise of the Party as may be required under its domestic law, which may take the form of individual contracts between the state enterprise and each of the other entities. Such contracts may be subject to regulatory approval. Activities and Investment in Electricity Generation Facilities 5. (a) Production for Own Use (b) An enterprise of another Party may acquire, establish, and/or operate an electrical generating facility in Mexico to meet the enterprise s own supply needs. Electricity generated in excess of such needs must be sold to [CFE], and CFE shall purchase such electricity under terms and conditions agreed to by CFE and the enterprise. Co-generation An enterprise of another Party may acquire, establish, and/or operate a co-generation facility in Mexico that generates electricity using heat, steam, or other energy sources associated with an industrial process. Owners of the industrial facility need not be the owners of the cogenerating facility. Electricity generated in excess of the industrial

18 92 TEXAS INTERNATIONAL LAW JOURNAL [VOL. 36:75 (c) facility s supply requirements must be sold to CFE, and CFE shall purchase such electricity under terms and conditions agreed to by CFE and the enterprise. Independent Power Production An enterprise of another Party may acquire, establish, and/or operate an electricity generating facility for independent power production (IPP) in Mexico. Electricity generated by such a facility for sale in Mexico shall be sold to CFE, and CFE shall purchase such electricity under terms and conditions agreed to by CFE and the enterprise. Where an IPP located in Mexico and an electric utility of another Party consider that cross-border trade in electricity may be in their interests, each relevant Party shall permit these entities and CFE to negotiate terms and conditions of power purchase and power sale contracts. The modalities of implementing such supply contracts are left to the end users, suppliers, and CFE and may take the form of individual contracts between CFE and each of the other entities. Each relevant Party shall determine whether such contracts are subject to regulatory approval. 109 Annex I Reservations for Existing Measures and Liberalization Commitments All three NAFTA nations attached schedules to Annex I. Those of Mexico include reservations to the following effect: Prior approval of the Mexican Foreign Investment Commission is required for more than 49% foreign ownership of an enterprise that drills oil and gas wells or constructs means for transportation of petroleum and its derivatives. 110 Until 1999, prior approval of the Mexican Foreign Investment Commission was required for more than 49% foreign ownership of an enterprise that constructs electricity generation plants, constructs and maintains electricity conduction lines and networks, or constructs electrical installations in buildings. 111 Only Mexican nationals and Mexican enterprises with a foreigners exclusion clause may (1) engage in the distribution, transportation, storage or sale of liquefied petroleum gas and the installation of fixed deposits 112 or (2) acquire, establish, or operate retail outlets engaged in the sale or distribution of gasoline, diesel, lubricants, oils, or additives. 113 Annex III Activities Reserved to the State Of the three NAFTA nations, only Mexico attached a schedule to Annex III. Section A ( Activities Reserved to the Mexican State ) of that schedule provides, in part: Mexico reserves the right to perform exclusively, and to refuse to permit the establishment of investments in, the following activities: 109. Id., Annex 602.3, at Id., Annex I, at 718, 724 (citing Article 27 of the Mexican Constitution, the Petroleum Law and Petroleum Regulations, and the Mexican Foreign Investment Law and Regulations) See id. at (citing Mexican Foreign Investment Law and Regulations) Id. at 725 (citing Petroleum Law, Petroleum Regulations, Mexican Regulations for the Distribution of Gas, and the Mexican Foreign Investment Law and Regulations) Id. (citing Petroleum Regulations and the Mexican Foreign Investment Law and Regulations).

19 2000] THE PROSPECT FOR FURTHER ENERGY PRIVATIZATION IN MEXICO Petroleum, Other Hydrocarbons and Basic Petrochemicals (a) Description of activities (i) (ii) 2. Electricity (a) Pemex incentive contracts: [E]xploration and exploitation of crude oil and natural gas; refining or processing of crude oil and natural gas; and production of artificial gas, basic petrochemicals and their feedstocks and pipelines; and [F]oreign trade; transportation, storage and distribution up to and including first hand sales of the following goods: crude oil; natural and artificial gas; goods covered by Chapter Six (Energy and Basic Petrochemicals) obtained from the refining or processing of crude oil and natural gas; and basic petrochemicals. 114 Description of activities: the supply of electricity as a public service in Mexico, including, the generation, transmission, transformation, distribution and sale of electricity. 115 Although a Mexican reservation states that [r]isk-sharing contracts are prohibited, 116 Annex provides that [e]ach Party shall allow its state enterprises to negotiate performance clauses in their service contracts. 117 D. Developments During NAFTA 1995 The Petroleum Law was amended to allow private investors to transport, store, and distribute natural gas, and to build, operate, and own related pipelines and installations. 118 This was implemented by new Natural Gas Regulations with regulatory authority in CRE. 119 CRE fixes the prices private distributors may charge. 120 Pemex is committed to supply available pipeline capacity in an open access program NAFTA, supra note 108, Annex I, at 759 (citing Articles 25, 27, and 28 of the Mexican Constitution, the Petroleum Law, and the Pemex Organic Law) Id. (citing Articles 25, 27, and 28 of the Mexican Constitution and the Electric Energy Law) Id. at Id. at 367. For a comparative analysis of risk-sharing contracts and performance clauses, see Rogelio López-Velarde, Mexico s New Petroleum Law, supra note 72, at See Decreto por el que se reforman y adicionan diversas disposiciones de la Ley Reglamentaria del Artículo 27 Constitucional en el ramo del petróleo [ Decree Reforming and Adding Various Provisions of the Law Regulating Constitutional Article 27 in the Petroleum Sector ], D.O., 11 de mayo de See Reglamento de Gas Natural [ Natural Gas Regulations ], D.O., 8 de noviembre de See also Ley de la Comisión Reguladora de Energía [ Law of the Energy Regulatory Commission ], D.O., 31 de octubre de See Directiva sobre la Determinación de Precios y Tarifas para las Actividades Reguladas en Materia de Gas Natural DIR-GAS [ Directive Regarding the Determination of Prices and Tariffs for the Regulated Activities of Natural Gas DIR-GAS ], D.O., 20 de marzo de Resolución del Pleno de la Comisión Reguladora de Energía sobre la solicitud de aprobación del Programa Gradual de Acceso Abierto , presentada por Pemex Gas y Petroquímica Básica [ Resolution of the Energy Regulatory Commission Concerning the Request for Approval of the Gradual Program of Open Access , Presented by Pemex Gas and Basic Petrochemicals ], D.O., 7 de agosto de For a detailed description of the initial bidding procedures, see Alejandro López-Velarde, Some Considerations, supra note 53, at 47, 49.

20 94 TEXAS INTERNATIONAL LAW JOURNAL [VOL. 36:75 New internal regulations of the Ministry of Energy superseded the 1993 reorganization of the Ministry of Energy, Mines and State Industry. 122 A new energy regulatory law gave CRE additional authority in natural gas. 123 Pemex invited bids for the private purchase of interests in secondary petrochemical plants A presidential decree approved the Program of Development and Restructure of the Energy Sector Bids were invited for the first zone of private gas distribution. 126 A CRE directive established a procedure for determining prices in the regulation of natural gas operations. 127 CRE approved an open access program by which Pemex must provide transportation service to resellers of natural gas. 128 The 1993 Foreign Investment Law was amended to allow more foreign investment in several non-energy sectors New foreign investment regulations: 130 (a) Excluded from the strategic areas of state exclusivity: (1) Activities related to transportation, storage, and distribution of gas other than liquefied petroleum gas ( las actividades relativas al transporte, el almecenamiento y la distribución de gas distinto al licuado de petróleo ) See Reglamento Interior de la Secretaría de Energía [ Internal Regulations of the Ministry of Energy ], D.O., 1 de junio de See Ley de la Comisión Reguladora Energía [ Law of the Energy Regulatory Commission ], D.O., 31 de octubre de See Petróleos Mexicanos: Aviso de Fallo de Licitación [Pemex: Notice of Bidding Award], D.O., 14 de noviembre de See Decreto por el que se aprueba el Programa de Desarollo y Reestructuración del Sector de la Energía, [ Decree Approving the Program of Development and Restruction of the Energy Sector, ], D.O., 19 de febrero de See Convocatorio numero CRE/01/96 para participar en la licitación pública internaciónal que tendrá por objeto el otorgamiento del primer permiso de distribución de gas natural para la zona geográphica de Mexicali, Baja California [ Public Notice Number CRE/01/96 for Participation in the International Public Bidding Whose Object Is Granting the First Natural Gas Distribution License to the geographic zone of Mexicali, Baja California ], D.O., 1 de marzo de See Directiva sobre la Determinación de Precios y Tarifas para las Actividades Reguladas en Materia de Gas Natural DIR-GAS [ Directive Regarding the Determination of Prices and Tariffs for Regulated Activities in Regard to Natural Gas DIR-GAS ], D.O., 20 de marzo de See Resolución del Pleno de la Comisión Reguladora de Energía sobre la solicitud de aprobación del Programa Gradual de Aceso Abierto , presentada por Pemex Gas y Petroquímica Básica [ Resolution of the Energy Regulatory Commission Regarding Application for Approval of the Open Access Program , Presented by Pemex Gas and Basic Petrochemicals ], D.O., 7 de agosto de See Decreto por el que se reforman, adicionan y derogan diversas disposiciones de la Ley Federal de Procedimiento Administrativo; de la Ley Federal sobre Metrología y Normalización; de la Ley Minera; de la Ley de Inversión Extranjera; de la Ley General de Sociedades Mercantiles y del Código Civil para el Distrito Federal en materia común, y para toda la República en materia federal [ Decree Reforming, Adding, and Repealing Various Provisions of the Federal Law of Administrative Procedure; of the Federal Law Regarding Metrology and Normalization; of the Mining Law; of the Foreign Investment Law; of the General Law of Business Associations and of the Civil Code for the Federal District in Related Matters and for the Republic in Federal Matters ], D.O., 24 de diciembre de See Reglamento de la Ley de Inversión Extranjera y del Registro Naticional de Inversiones Extranjeras [ Regulation of the Foreign Investment Law and of the National Registry of Foreign Investment ], D.O., 8 de septiembre de See id. art. 2(I)(a) (referring to the Petroleum Law).