Mexico will seek to reach an agreement in dispute over pipelines

López Obrador expressed concerns about unfavorable energy deals for the country

Mexico will seek to reach an agreement in dispute over pipelines
Earlier this year, President López Obrador vowed to respect contracts signed under the previous administration - Photo: Eduardo Trejo/EL UNIVERSAL
English 03/07/2019 17:04 Reuters Mexico City Actualizada 17:21
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Last week, Mexican state power utility CFE said it would seek to negotiate a “fairer” resolution to contractual disputes with companies who are behind in the construction of several pipelines and whose costs have been questioned by President López Obrador.

Earlier this year, President López Obrador vowed to respect contracts signed under the previous administration for the infrastructure, but the CFE is hoping to secure better terms for the projects.

The dispute centers on 7 projects undertaken by companies that include Mexican billionaire Carlos Slim’s infrastructure arm Grupo Carso, TransCanada Corp, and Mexican energy firm IEnova, a unit of U.S. company Sempra Energy.

Previously, López Obrador expressed concerns about unfavorable energy deals for the country.

On June 27, López Obrador pushed backed against Canadian concerns that gas pipeline contracts awarded under Peña Nieto's government might not be honored, saying the terms of the agreements were “abusive” toward the state.

On June 16, the Canadian ambassador to Mexico, Pierre Alarie, wrote on Twitter that the Mexican government appears “not to wish to respect natural gas pipeline contracts,” and said he was deeply concerned about the signal being sent.

López Obrador said it was natural for Alarie to defend Canada’s interests but took a defiant stance when asked about the dispute during his regular morning press conference.

“Here it was stated that those contracts were abusive. I called them unfair contracts because they were handed over with all the benefits for the companies,” López Obrador said, arguing that their terms would lead to the ruin of the CFE.

“A deal will be reached because we too have to defend the assets and the interests of the Mexican people,” he added.

Also, IEnova, a unit of U.S.-based Sempra Energy, says the CFE is seeking arbitration over a contract it signed in partnership with TC Energy to build a USD $2.5 billion pipeline from Texas to the port of Tuxpan.

News of the arbitration request dragged down IEnova’s shares over 4% on June 26. The company’s stock at one point slumped by over 8% on Juen 27. Shares in Sempra were down 1.1%.

Paty Mitchell, a spokeswoman for Sempra, said the company was analyzing the content of the arbitration request and its legal basis, reaffirming it was ready to talk to the CFE.

A CFE source, speaking on condition of anonymity, said the utility had notified Fermaca, a Mexican infrastructure company building another pipeline, that it was seeking arbitration.

Separately, Mexico’s Grupo Carso, an infrastructure firm controlled by billionaire Carlos Slim that is also involved in the pipeline disputes, said it would analyze an arbitration request it had received from the CFE. Shares in Carso fell by 2.25%.

Nevertheless, López Obrador rejected the suggestion that the spat could interfere with the ratification of the USMCA, a new trade deal approved by the Mexican Senate earlier this month.

Days later, during the G20, Canada expressed its concern about the gas pipeline dispute that raised diplomatic tensions with Mexico during the Group of 20 nations summit in Japan, but the matter could be resolved soon, Finance Minister Carlos Urzúa said this weekend.

Urzúa said he met with Canada’s Finance Minister Bill Morneau during the summit and was “optimistic” there would be an agreement soon.

“We hope this problem is resolved very soon (...) That it doesn’t even reach the level of international arbitration, and that simply an agreement is reached between the sides. We are very optimistic about that,” Urzúa said.

This Monday, the U.S. Chamber of Commerce criticized the Mexican state-owned power utility CFE’s filing with an international court to begin arbitration with several infrastructure companies over pipeline contracts, saying the move could undermine investor confidence.

Last week, the CFE said it would aim to negotiate a “fairer” outcome to contract disputes with several companies through a mediation process overseen by the London Court of International Arbitration. The U.S. Chamber of Commerce also said that it was concerned by the move, stressing the importance of legal certainty to secure foreign investment.

“This action risks sending a negative signal to the U.S. and other international investors about the business and investment climate in Mexico,” the group said. “We, therefore, urge CFE and the Government of Mexico to reconsider this decision and to observe the president’s pledge to honor the sanctity of existing contracts.”

On Monday, the CFE began talks with pipeline builder Fermaca as part of a push to negotiate independently with the companies, CFE spokesman Luis Bravo said.

“All the companies have agreed to talk about the contracts. Today we met with Fermaca to determine how to negotiate,” CFE spokesman Luis Bravo said. The talks will take place in parallel to the process in the international arbitration court, he added.

The CFE’s pursuit of arbitration has sparked criticism from others in the international community. Canada raised concerns about the dispute, and Moody’s said the spat was “credit-negative” for the utility, the companies involved and the sector as a whole.

Furthermore, on Tuesday, Mexican energy infrastructure company IEnova, a unit of U.S.-based Sempra Energy, said it had not recently begun arbitration against Mexican state power utility CFE in a dispute over pipeline contracts.

Previously, the CFE claimed that several pipeline companies with which it is seeking to renegotiate contracts began arbitration before beginning negotiations with the utility.

The CFE also announced that it is seeking USD $899 million in a dispute with natural gas pipeline firms and that talks with Canada’s TC Energy Corp and Grupo Carso would start within a few days.

Also, the head of the CFE, Manuel Bartlett, lashed out at the critics of the Mexican government’s efforts to rework the deals, suggesting they were ill-informed about the process and that the companies had sought arbitration before the government did so.

The pipeline companies “pursued arbitration before entering into negotiations with us,” Bartlett told reporters, saying the government wanted to recover USD $899 million in payments made to pipeline companies

The CFE has challenged the contracts through a mediation process overseen by the London Court of International Arbitration (LCIA) but the organism declined to comment to maintain the confidentiality of the arbitration process.
 

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