Bilateral Investment Treaties Would Likely Have a Key Role in Mitigating Investment Risks If Mexico Undertakes Energy Reforms

by King & Spalding
Contact

As described in detail in another article in this Newsletter entitled "Mexican Congress to Consider Constitutional Oil and Gas Reforms: Bold Stride Forward or Half-Step?," the reform of Mexico's energy industry and its national oil company Pemex is an avowed priority of the nation's President Enrique Peña Nieto of the Institutional Revolutionary Party (PRI). President Peña Nieto's reform proposal would eliminate Pemex's longstanding and constitutionally-mandated monopoly in the oil and gas business. The Peña Nieto's main opposition party the business-oriented Partido de Acción Nacional (PAN) is pushing for an even more complete overhaul of Mexico's energy sector. PAN's alternative reform proposal suggests a large-scale privatization of the Mexican oil and gas business that would allow private companies to, among other things, enter into concession contracts in the upstream sector—a highly controversial matter between both parties.

The potential opening of the exploration and production market in Mexico has caught the attention of international oil companies, which generally welcome the opportunity to tap onto Mexico's shale and deep-water oil and gas reserves in the Gulf of Mexico. But given the Mexican population's national sentiment surrounding their oil and gas resources—Mexico still celebrates as a national holiday the 1938 nationalization of the oil industry—potential foreign investors face risks over Mexico's long-term commitment to this energy reform—assuming it gets passed.

While foreign investors cannot control the Mexican government's potential appetite for amending, or even disavowing, this expected new legislation, they can protect against certain future adverse changes in the legal and regulatory framework by availing themselves, at the time of investment, of Mexico's well-established and vast net of international treaties on direct foreign investment. The uncertainty surrounding the new energy legislation makes it all the more important for foreign investors to take advantage of these treaties.

Mexico is a party to no fewer than twenty-eight bilateral investment treaties (BITs) with other nations around the globe, including the vast majority of Western Europe, several Eastern European states, and other South American and Asian countries. Mexico is also a party to the North America Free Trade Agreement (NAFTA), a multilateral treaty with the United States and Canada, whose chapter 11 on foreign investment offers protections comparable to those in BITs.

These bilateral treaties set forth enforceable legal obligations on the part of the signatory states vis-à-vis the investing companies of the other signatory state. They typically include a prohibition against expropriation without compensation, an obligation to afford fair and equitable treatment, and full protection and security to investments, and a prohibition against discrimination. A distinct feature of BITs is that they usually offer the investor a direct recourse against the state party. If a dispute arises regarding a State's compliance with its obligations in a given treaty, most BITs allow the foreign investor to initiate international arbitration directly against the State in various arbitral fora (notably, however, Mexico is not a party to the ICSID Convention). The arbitration panel constituted per the treaty has the ability to award damages against the State (absent an express limitation in the particular BIT—a rare occurrence), and its award is enforceable under the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, a multilateral treaty to which 149 states are party. Barely used 20 years ago, today investors make use of international arbitration under BITs with relative frequency as a mechanism—sometimes the only mechanism—to enforce their rights against states.

BITs protect investments of many kinds—as long as they belong to a national or company of one of the Contracting Parties. The definition of investment typically includes not only physical assets but also legal and contractual rights, licenses and permits, titles to money, intellectual property, etc. Shares or stock in a company—whether directly or indirectly owned or controlled—usually also constitute a protected investment. In other words, BITs cover indirectly-held shares of a several-tier subsidiary (normally the investment vehicle).

This expansive definition of a protected investment has not been without controversy. Some authors raised concerns of "BIT shopping" i.e., creating a "shell company" in an intermediary state that entered a BIT with an investment-recipient state, with the main purpose of affording BIT protection to that investment. But, for the most part, arbitration panels constituted under BITs have considered that structuring an international investment through a subsidiary in a third country to maximize protection against adverse state action is a legitimate conduct by a prospective investor—just as legitimate as international tax planning—and does not deprive the investment of its due protection under the relevant treaty.

Not all BITs, however, afford the same level of protection. Seemingly-minor wording differences between two BITs can make the difference between recovering the fair market value of the investment, or not recovering any damages at all. When evaluating an investment opportunity of the significance that Mexico's oil and gas sector is likely to require—both in terms of duration and amount—a careful planning of the investment's structure (via BIT or NAFTA protection) may turn out to be critical years later in a worst-case scenario that hopefully would never materialize. Companies considering an investment in Mexico now or later are thus well advised to analyze their options carefully and to obtain specialized advice as to the best way to structure their investment.


 Isabel Fernández de la Cuesta
 New York
 +1 212 556 2115
 ifernandez@kslaw.com

 View Profile »

 

Written by:

King & Spalding
Contact
more
less

King & Spalding on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.