The López Obrador Government enters into a dispute with the companies that built the marine pipeline that goes from Texas to Veracruz
The Yucatan Peninsula darkened at least once in the months of March, April and June of this year. Southeastern Mexicans suffered the three massive power outages on warm spring days when the thermometer reached 40 degrees. The demand for light in those days was very high, mainly due to the intense use of air conditioning, but the electricity supply was not enough. The region has suffered for several years a significant shortage of natural gas to generate the electric power that starts not only the air conditioning systems, but also the industry. “There is no light because there is not enough gas in the Yucatan Peninsula,” summarizes Gonzalo Monroy, energy consultant and GMEC director.
To repair the historic shortage, the Mexican Government organized in 2016 the construction of a gas pipeline to bring the hydrocarbon from the United States. The project was ambitious: a 42-inch pipeline at the bottom of the Gulf of Mexico that traveled 800 kilometers from Brownsville (Texas, USA) to Tuxpan (Veracruz) to supply a third of all the natural gas needed for Mexico. The $ 2 billion work was assigned to Canada’s TCEnergy – previously known as TransCanada – and IEnova, a subsidiary of US Sempra. The plan, designed by the Administration of former President Enrique Peña Nieto, was that by the end of 2018 the gas was already on the Peninsula. The companies took almost six more months to finish the construction and on June 11, 2019 they announced that the pipeline was ready.
The Federal Electricity Commission (CFE), the state company in charge of the electricity supply, had to issue a certificate in which it accepted the finished work and in which it put a start date of operations. This has not happened yet. Its director, Manuel Bartlett – a veteran politician with little experience in the energy sector – then proposed a renegotiation of the contracts signed in 2016 with TCEnergy and IEnova. “The purpose of the Government is to renegotiate contracts, seek equitable contracts,” said the CFE director, then. The firms refused and both sides threatened to start a fight in international courts.
President Andrés Manuel López Obrador has described the conditions of the contracts as “excessive and leonine”. His Government sought with the renegotiation two objectives: to conserve the amount of a letter of credit given as guarantee by the companies and to modify the responsibility of the parties in events of force majeure (such as natural disasters, accidents, or social movements). Monroy, from GMEC, explains that the terms of the original contract between the companies and the CFE are within international standards and that they are not abusive, as Bartlett has argued. “CFE is going to lose because the contract is like this and they cannot deny it and when they lose they will be very expensive to the Mexican Government, they will have to pay up to the taxis of the lawyers,” says Monroy. López Obrador has organized negotiation tables between the CFE and the companies involved in recent weeks, without having reached an agreement so far. López Obrador has assured that the dispute could end this week.
The tension through the pipeline has already escalated internationally. The first to express his dissatisfaction was the Canadian ambassador to Mexico, Pierre Alaire: “I am deeply concerned about the recent actions of the CFE and the signal they send that, despite the statements of López Obrador, Mexico does not want to respect gas pipeline contracts, ”he wrote in June, on his Twitter account. The diplomat’s message gave visibility to the conflict that began to attract attention in Ottawa. “The Canadian Government is concerned about the actions of the Federal Electricity Commission, which requires the elimination of certain standard contractual clauses, such as the force majeure clause,” Sylvain Leclerc, spokesman for the Ministry of Foreign Affairs of Canada, told: “It seems to us a breach of written and issued contracts by the Mexican Government, through the CFE. We are in talks with the Mexican Government to emphasize the importance of respecting duly signed contracts, ”he added.
A month later, on July 25, the Governor of Texas, Greg Abbott, sent a letter to President López Obrador requesting that the negotiations give way to the operation of the gas pipeline. “Mexico and Texas would benefit,” Abbott wrote. Although neither the US nor Canada have openly stated that the pipeline can affect the commercial relationship between the three countries, the Texan Governor has let one of the biggest fears in Mexico slip: the ratification of the Free Trade Agreement. “Doubts about delays and long-term and business contracts between Mexico, the United States and Canada can negatively impact our economies in the following years. As you know, the United States, Mexico, Canada (TMEC) Treaty has yet to be ratified by all three countries. Violations of the Free Trade Agreement or breach of contracts could endanger the TMEC, ”said Abbott.
The matter has also been debated within the López Obrador Government. Carlos Urzúa, who served as Secretary of the Treasury until a month ago, acknowledged in an interview to the magazine Proces that one of the reasons for his resignation was the dispute over the pipeline. Urzúa did not agree to renegotiate the 2016 contract. “It may be true that the pipeline has gone expensive, as Bartlett says, but the truth is that we signed a contract and we must comply,” he said. The former minister accused Bartlett of not having enough knowledge on the subject and of generating a problem where a solution was necessary. “The lawsuit will last for years and it is very likely that Mexico will lose it, besides that we will not be able to use that pipeline for a long time. It is literally playing with fire and the well-being of millions of Mexicans living in the Yucatan Peninsula, where there are already severe blackouts because there is no gas, ”said Urzúa.