Mexico's tax authority revises import permit rules, favoring state Pemex

Mexico City — Mexico's tax and customs authority, or SAT, has said it will no longer issue or renew petroleum import and export permits to companies other than state oil and gas company Pemex, a move market observers said would limit competition, even in the upstream sectors.

The rule change, which went into effect June 14 but was announced June 11, was the latest in a series of attempts by President Andrés Manuel López Obrador's administration to weaken, and eventually overturn, Mexico's energy liberalization. The move came several days after a June 6 election that gave more power to López Obrador's MORENA party.

MORENA won 11 of 15 gubernatorial elections that were held June 6, giving López Obrador enough support from states to revise the constitution to undo Mexico's liberalization. But MORENA and its allies retained a simple majority in the lower house of Mexico's congress, falling short of the two-thirds majority needed to revise the constitution. Still, López Obrador said he will seek new alliances in Congress to reach that two-thirds majority.

In the meantime, it appears López Obrador will depend on the administrative state to achieve his goals.

"This regulation is the most severe so far, even more so than the recently passed hydrocarbons law," said Diego Campa, a partner at law firm Campa and Mendoza who is advising clients on the matter.

Campa was referring to a hydrocarbons law, currently being fought in court, that required holders of import and export permits to comply with minimum storage capacity requirements set by the Energy Secretariat, and allowed regulators to cancel permits if holders failed to comply.

The SAT import permit, which is valid for three years, is needed to begin import and export operations. But the permit is only issued when all other permits have been obtained and all the infrastructure is in place, so it may go unnoticed by some companies, said Campa.

The SAT change clearly shows López Obrador is finding another route to limit the role of private importers and exporters, said one permit-holder speaking on the condition of anonymity.

López Obrador intends to increase refined product output and reduce Mexico's reliance on refined product imports, which are sent primarily from the US, and give more market power to state-owned Pemex.

Pemex has been losing market share since the first permits were granted in 2015, following the liberalization in late 2013, Pemex data shows. Mexico currently imports roughly 400,000 b/d of gasoline and 300,000 b/d of diesel, or 60% of sales, according to Pemex data.

There are currently roughly 100 import contracts for gasoline, and the same for diesel fuel, although companies often hold multiple import contracts. Valero, for instance, holds four contracts to import gasoline and diesel into Mexico, according to SENER data.

The SAT change could also affect petroleum producers, who may have to turn to Pemex to export their crude output, Campa said.

The SAT rule change will not necessarily affect imports immediately as SAT permits are issued for three years. It is difficult to tell how many of those contracts are due to expire soon, as SAT permits are not publicly available.

SAT could not be reached for comment.

The SAT revision will likely be fought in court, although that will not necessarily prevent López Obrador from pursuing his goals through other administrative agencies, as he seeks to gain enough support to change the constitution.

But changing the constitution will only stop new investments as projects already in operation will continue, said Claudio Rodriguez Galán, the head of law firm Thomson & Knight Mexico's office.

"The law cannot be retroactive. Those contracts that are already in operation have to be respected," Rodriguez Galán said, adding that the rights of companies are also protected by international treaties signed by Mexico, most notably the US-Mexico-Canada agreement, known as USMCA.

Mexico has over a dozen international investment treaties signed that offer some sort of protection to investors.

Rodriguez Galán said the government should make a decision soon about changing the constitution so that the current paralysis in the energy sector ends.

"The energy sector requires legal certainty, and that has been absent since the government began attacking the reform," he said, adding that this paralysis is the only way in which the government is effectively blocking the energy liberalization.