Observers laud Mexico Supreme Court ruling on fuel market, but expect few changes

A recent Mexican Supreme Court ruling that enables the country's upstream regulator to force state Pemex to publicly disclose its wholesale fuels prices and discounts and establish limits to its pricing power is a positive step, but its practical implications are questionable, observers say.

"The decision has an impact on the level of certainty there is in the market, that the judicial system is still an effective counterweight," Julia Gonzalez Romero, an attorney at Mexico City-based law firm Gonzalez Calvillo, said June 16.

The court's ruling is also relevant because it declared that all market participants are to enjoy its benefits, not just those private companies that had sought action by lower courts, Gonzalez Romero told S&P Global Commodity Insights.

The ruling, issued June 16, stated that a 2021 decree issued by Mexico's Congress eliminating certain regulations governing Pemex was unconstitutional. The regulations Congress eliminated then included obligations for Pemex to openly disclose its prices to its wholesale clients and the discounts it grants. It also includes terms and conditions for the transport and storage of hydrocarbons.

The Supreme Court, in its ruling, said Mexico's midstream regulator, the Energy Regulatory Commission, or CRE, could issue regulations on Pemex to prevent it from abusing its substantial market power.

Analysts and industry associations have criticized the CRE for favoring Pemex and state electricity utility CFE with its rulings during the administration of leftist President Andrés Manuel Lopez Obrador, whose six-year term is scheduled to end in December 2024. The CRE has also been knocked for obstructing the operation of private companies by delaying the issuance of permits. Industry associations have estimated there are more than 2,000 permits related to gasoline, diesel, and LPG awaiting CRE authorization.

Little impact

Observers and market participants say that in practice, however, the Supreme Court's ruling will have little impact as the CRE is unlikely to enforce it. In Mexico's fuel storage sector, for example, where Pemex failed to meet legal obligations under the congressional decree, nothing happened, observers said.

According to data from Mexico Evalua, a Mexican think tank, delays at CRE and its one-sided regulations have cost the fuels sector roughly $2.7 billion over the last four years. This has some would-be investors in Mexico's energy sector to "reconsider" or "delay" their decisions, Oscar Ocampo, the energy coordinator with the Mexican Institute for Competitiveness, told S&P Global June 19. "Those who are already in the market have seen their costs soar," he said.

Soon after the 2021 decree was passed, private energy companies in Mexico were afraid that, without regulations, Pemex could set prices at which they could not compete, Ocampo said. So, they challenged the decree by seeking "amparos" or temporary orders of protection, from lower courts. The ruling by the Supreme Court is intended to establish a permanent order of protection.

"It does not change the situation materially, but it does help with the perception of legal certainty," Ocampo said.

After the 2021 congressional decree, one of the changes that did materialize, but favoring Pemex was a lack of transparency in the company's operations, said Alejandro Montufar Helu, CEO of Petrointelligence, a provider of data and intelligence on retail prices in Mexico.

Pemex no longer provides details about the discounts it offers to its clients, or which clients get higher discounts, and while the Supreme Court's ruling addresses this, it alone will not change it, Helu said June 19.

"For that to change," he said, "the CRE would have to specifically issue regulation that forced Pemex to disclose those prices, and that is unlikely."