Advancing energy self-sufficiency while making progress on environmental protection: a balancing act

However, several experts on the matter have questioned the justification for such reform. An alternative justification is to find a use for the fuel oil produced by Pemex, which is disdained at the international level due to its harmful effects on the environment. Fuel oil is, broadly speaking, a residue with a high sulfur content that remains after refining crude oil. It can be used as an industrial fuel and was typically used for the generation of electricity on ships; however, due to its inefficiency, high cost, and high volume of polluting emissions, its use is increasingly limited. In fact, some international instruments have restricted the possibility of using fuel oil. For example, in March 2020, an amendment to Annex VI “Regulations for the prevention of air pollution from ships” (IMO 2020) of the International Convention for the Prevention of Pollution from Ships (MARPOL), issued by the International Maritime Organization (IMO), entered into force. The IMO is the United Nations body responsible, among other matters, for preventing marine pollution by ships. Currently, 160 states are party to this treaty. IMO 2020 prohibits ships flying the flag of any of the countries party to this treaty from using fuels with a sulfur content greater than 0.5% (mass/mass). According to this organization, IMO 2020 “will bring significant health and environmental benefits to the world, particularly for populations near ports and coasts.” Although the objective of this amendment is positive for the environment, Pemex suffered certain collateral economic effects, since the international demand for the fuel oil it produces was considerably reduced. In February 2021, using 43.5% of its total installed capacity, Pemex produced 284,100 barrels per day of fuel oil, the petroleum product produced in the largest quantity. With the entry into force of IMO 2020, the fuel oil produced by Pemex cannot be used in the international maritime market, because it contains between 3.5% and 5% sulfur. Faced with this problem, Pemex found a way out: its acquisition by CFE for use as fuel in the generation of electric power. In its 2021-2025 Business Plan, Pemex stated that it would seek to increase the acquisition of fuel oil by CFE for use in the generation of electric power. There are at least two obstacles to Pemex's business plan. First, there is a legal obstacle, since the regime established following the 2013 constitutional energy reform gives priority to clean energy generation sources. Second, there is an environmental obstacle, since using fuel oil instead of promoting the use of clean energy produces an extremely high ecological impact. With respect to the first issue, the Federal Administration has sought to implement various regulatory, administrative, and legal measures that allow CFE to obtain priority within the Wholesale Electricity Market to generate electricity using the old plants that operate on fuel oil. The Reform to the Electricity Industry Law is one of those measures, and seeks to alter the order of energy dispatch, among other mechanisms, in order to favor CFE over the rest of the participants in the Wholesale Electricity Market that use more modern and less polluting technologies. Participants in the electricity industry, members of civil society, and various public bodies have brought domestic challenges against the Reform to the Electricity Industry Law, specifically amparo proceedings arguing its unconstitutionality. Although some judgments on the merits have granted protection against the reform, these only benefit those who brought the proceedings. The District Courts have also suspended the effects of the Reform as part of the resolutions issued in the suspension incidents, which remain in force. However, Collegiate Circuit Courts have begun to revoke some of these suspensions, on the argument that the Reform does not yet cause harm to the legal sphere of the complainants, thereby implying the criterion that the appropriate procedural moment for the amparo proceedings to be analyzed on the merits will be after the issuance of the regulations implementing the reform, which should occur in the coming months. In parallel, many members of the industry have considered bringing international arbitrations under investment promotion and protection treaties, in which they would argue violations of the principles of fair and equitable treatment, minimum standard of treatment, national treatment, and measures tantamount to expropriation or indirect expropriation. To date, these arbitrations have not been brought, mainly due to the suspensions with general effects issued by the judiciary, which are still in force. As for the second issue, the burning of fuel oil produces the emission of greenhouse gases, such as sulfur dioxide (SO2) particles, which are considered harmful to health due to their effects on the circulatory and respiratory systems. To date, the Federal Administration has not implemented or adopted any measure to eradicate this issue, which requires special attention. By virtue of these reasons, it is expected that the new outlet for Pemex's fuel oil, created by the Reform to the Electricity Industry Law, will continue under strict review for legal, environmental, and public health reasons. While the Mexican State is responsible for leading national development (including energy security and reliability), in accordance with Article 25 of the Political Constitution of the United Mexican States, such development must be comprehensive and sustainable. Therefore, the strengthening of the power of the State and of the oil companies must be compatible with the conservation of the environment. These arguments, among others, are part of the amparo proceedings that are being examined by the federal courts. At Von Wobeser y Sierra, S.C., we would be delighted to share our experience on the legal aspects covered in this article, or any other related matter, as well as our multidisciplinary ESG (Environmental, Social, and Corporate Governance) perspective. For additional information on the subject of this note, please contact our experts: Adrián Magallanes, Partner: +52 (55) 5258-1077 | amagallanes@vwys.com.mx Rodrigo Barradas, Associate: +52 (55) 5258-1077 | rbarradas@vwys.com.mx Jorge Vázquez, Associate: +52 (55) 5258-1059 | jvazquez@vwys.com.mx

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