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CFE blocking pipeline operations prior to contract renegotiation: Mexico Energy Law Association

Mexico City — By not acknowledging their completion and allowing new natural gas pipelines to operate, CFE is beginning contractual negotiations with developers in bad faith, according to the chair of foreign affairs of Mexico's Energy Law Association

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"This could become an inquisition board where the state will impose its position instead of a negotiation table," Claudio Rodriguez told S&P Global Platts on Monday. Without releasing a certificate of operation, CFE would be "starting negotiations in bad faith," he added.

Last week, CFE said that allowing TC Energy and IEnova's 2.6 Bcf/d Sur de Texas-Tuxpan Pipeline (STTP) to operate without renegotiating its contract would legitimize capacity payments the pipeline operator is seeking to collect and that CFE is disputing.

The state power utility seeks to renegotiate a force majeure clause and related fixed-capacity payments on STTP and six other pipelines on which construction was delayed.

By allowing the marine pipeline to operate, CFE will show it is willing to compromise on specific issues to obtain the contractual changes it desires, said Rodriguez, who heads the Mexico City office of the law firm Thompson & Knight.

Allowing STTP to begin service would not be an impediment to renegotiate the pipeline's transportation contract, IEnova said two weeks ago in a statement.

The marine pipeline is a crucial piece of infrastructure, increasing Mexico's current gas import capacity by 40% and as well as fuel access in regions of the country with supply constraints.

CFE did not respond to comment requests on Monday about its willingness to compromise on specific issues during contractual renegotiations.

SLIM ODDS OF WINNING

If the sides cannot reach a deal at the negotiation table, it is unlikely CFE will win an international arbitration process to modify pipeline transportation contracts, Rodriguez said.

Mexico's Centre of Private-Sector Economic Studies (CEESP) considers that CFE's possibilities of winning an arbitration against fixed capacity payments on stalled pipeline projects are slim.

"Usually, arbitration on this kind of contract happens when differences emerge in the interpretation or the fulfillment of clauses rather than due to contractual modifications," CEESP said in a statement released this past weekend.

"Based on past experiences, it can be said that if both sides go to arbitration, there is a considerable probability that CFE will lose due to the predisposition to favor contractual certainty under these processes," CEESP concluded.

How long the arbitration process could take will depend on the guidelines each international arbitration court has and the complexity of the case. "This could take from several months to many years," Rodriguez said.

On Friday, CFE General Director Manuel Bartlett told local media it seeks the reimbursement of $3 billion in fixed capacity payments made to date as part of its contractual renegotiation request.

INTERNATIONAL STANDARD CONTRACTS

Fixed capacity payments are a fundamental contractual component of energy projects worldwide, something CFE will not be able to argue as onerous under an international arbitration process, Rodriguez said.

"Because of the high risk related to financing, banks and developers need to have the certainty they will receive payments while they build the project," he added.

Within Mexico, there are no precedents in the natural gas market on a dispute of this kind. Although in the electricity sector, companies had fixed capacity payments under the legacy independent power generator scheme, known as PIE, Rodriguez said.

With PIE contracts as well as other financed public works, the state guaranteed the right of way, shielding investors from this risk. However, under the energy reform, the responsibility of acquiring the right of way was assigned to pipeline developers, he added.

The situation is more intricate considering that under the energy reform, Mexico's Energy Secretariat, known as SENER, organizes aboriginal consultations and engages with communities and project developers during the project's social impact assessment, key steps that influence the right of way acquisition, Rodriguez said. "If the state wanted to leave the right of path risk to the private sector, then it has to accept the possibility of a force majeure happening," Rodriguez said.

For example under the stalled TC Energy 866 MMcf/d Tuxpan-Tula pipeline, SENER was unable to successfully complete consultations with several aboriginal communities in Puebla's mountain range.

CFE General Director Manuel Bartlett has opposed the privatization of Mexico's energy sector, Rodriguez said. "I believe this renegotiation request opens the doors for the state to coerce the private sector based on ideological postures," he added.

-- Daniel Rodriguez, daniel.rodriguez@spglobal.com

-- Edited by Christopher Newkumet, newsdesk@spglobal.com