The decree to reform the 2014 Hydrocarbons Law, or Ley de Hidrocarburos 2014, that expands the Mexican government’s power to review, suspend and cancel hydrocarbon permits leaves some natural gas and other hydrocarbon pipeline projects vulnerable to permit suspension or termination, Fitch Ratings says. However, the reform is not expected to affect the credit of Fitch-rated natural gas pipeline projects as force majeure (FM) clauses in the contracts with off-takers protect project revenues and consequently bondholders. The law was recently published in the Federal Official Gazette and is targeted at midstream and downstream segments.

The reform allows the Ministry of Energy, or Secretaria de Energia de Mexico (SENER), and the Energy Regulatory Commission, or Comision Reguladora de Energia (CRE), to suspend or revoke permits if there is an imminent threat to national security, energy security or the national economy. The terms are broad and a maximum suspension period is not specified, allowing the law to be subjectively interpreted and applied at the expense of private investors. Permits can be revoked if the CRE determines an entity is not complying with the law, whereas breaching the law’s terms would only lead to fines under the original 2014 Law.

In the event of a suspension, the SENER or CRE may take over the administration and operation of a private facility with existing staff or hire a third party to operate the plant without paying any compensation to the owners. Permit holders may seek financial compensation for any damages incurred due to government action. However, there is no guarantee damages would be compensated fully, if at all, or be received on a timely basis to continue making debt service payments. Permits may be restored when the permit holder demonstrates that the grounds for suspension have been resolved; otherwise, they may be revoked.

Unlike typical infrastructure projects, Fitch’s limited number of rated natural gas pipeline projects benefit from unusually strong FM provisions, which require the off-taker, Comision Federal de Electricidad (CFE; BBB-/Stable), to ensure continued and full revenue flow for an indefinite period. Additionally, CFE must make a termination payment equal to the project’s outstanding debt if it terminates the contract agreement during a FM event caused by government action.

This is in contrast to typical project revenue contracts, which can be terminated without an off-taker termination payment if the FM event extends beyond a specified term, exposing bondholders to non-payment as the maximum suspension period is currently undefined under the reform. Standard FM clauses usually found in project revenue contracts generally limit the period during which the off-taker is required to continue paying without service and can contain more ambiguous language regarding the definition of a FM event.

US gas imports supply 75% of Mexico’s total gas demand, and gas pipelines are less likely to be targeted under the new law as a result. Petroleos Mexicanos’ (PEMEX; BB-/Stable) gas production declined by 3.7% every year on average since 2010, driven primarily by the fall in Sureste and Burgos total production. Gas-fired power plants produced more than 60% of the country’s power generation in 2019 and 2020, and CFE plans to increase its gas generation capacity over the next few years.

The decree also introduces the legal concept of “negativa ficta” for project permit approvals. If the period set for a permit issuance lapses without an explicit resolution from the authority, the silence would be treated as a permit denial. This, in combination with the other changes to the law, is expected to slow or prevent the development of new hydrocarbon projects in Mexico. The reform was recently partially suspended by a federal judge and Fitch anticipates further legal opposition.