Chapter 8 of the USMCA consists of two paragraphs that expressly recognize Mexico’s ownership rights to its hydrocarbons, in accordance with Mexico’s Constitution. This chapter, which focuses on Mexico for historic and political reasons, is a stark contrast from the other 33 chapters of the USMCA, which in fact regulate trilateral trade matters among the three signatory countries.
The USMCA does not dedicate any other chapter specifically to the regulation of energy. The absence of a substantive energy chapter is significant, particularly given that the North American Free Trade Agreement (NAFTA) included a chapter dedicated to energy, as well as to basic petrochemicals. However, as discussed below, although Chapter 8 itself does not reflect an agreement over energy sector trade topics, other sections of the USMCA do apply to the energy industry.
II. EXECUTIVE SUMMARY
Chapter 8 of the USMCA was inserted during the negotiations by Mexico’s current administration and, at first glance, such chapter seems to contradict provisions of Mexico’s 2013 constitutional reforms that opened the petroleum sector to private and foreign companies. In any case, other provisions in the USMCA beyond Chapter 8 protect and regulate foreign investment in Mexico’s energy sector.
In lieu of a summary, the full text of Chapter 8 is reprinted below:
Article 8.1: Recognition of the United Mexican States’ Direct, Inalienable, and Imprescriptible Ownership of Hydrocarbons
- As provided for in this Agreement, the Parties confirm their full respect for sovereignty and their sovereign right to regulate with respect to matters addressed in this Chapter in accordance with their respective Constitutions and domestic laws, in the full exercise of their democratic processes.
- In the case of Mexico, and without prejudice to their rights and remedies available under this Agreement, the United States and Canada recognize that:
(a) Mexico reserves its sovereign right to reform its Constitution and its domestic legislation; and
(b) Mexico has the direct, inalienable, and imprescriptible ownership of all hydrocarbons in the subsoil of the national territory, including the continental shelf and the exclusive economic zone located outside the territorial sea and adjacent thereto, in strata or deposits, regardless of their physical conditions pursuant to Mexico’s Constitution (Constitución Política de los Estados Unidos Mexicanos).
III. LEGAL DISCUSSION
As mentioned, Chapter 8 does not impose any obligations on the Parties, other than to respect the sovereignty of the other Parties, which is to be expected in any international treaty. Furthermore, paragraph 2, with respect to Mexico, is consistent with Mexico’s existing constitutional framework, and, therefore, does not add anything to such legal framework.
Additionally, Chapter 8 does not interfere with the protections provided in other chapters of the USMCA, thus making the legal impact of Chapter 8 almost nonexistent.
However, to understand the energy-related obligations undertaken by the Parties under the USMCA, one must consider other chapters beyond Chapter 8, such as: Chapter 14: Investment; Chapter 15: Cross-Border Trade in Services; and Chapter 22: State-Owned Enterprises and Designated Monopolies.
In Chapter 14, for example, the relevant provisions pertaining to energy relate to the investor-state dispute settlement (ISDS) procedure, which applies to investments in oil and gas, power generation, telecommunications, transportation, infrastructure and other listed sectors in which companies have a contract with Mexico’s federal government (Annex 14-E-6 (b) “covered sectors”).
On the other hand, Chapter 15 provides three basic protections to foreign investments generally, namely, Most-Favored-Nation Treatment, National Treatment and other minimum standard of treatment provisions, which are all discussed in our firm’s legal summary of Chapter 15.
Finally, Chapter 22 is a new chapter that places restrictions on state-owned enterprises (SOEs) and designated private monopolies stipulating that USMCA Parties are prohibited from discriminating against foreign enterprises.
It is important to mention Chapters 14, 15, and 22 here, in order to be able to read Chapter 8 in context, understand its scope and not misinterpret the energy regulations contained in the USMCA.
It is somewhat misleading to call Chapter 8 “the energy chapter” of the USMCA because energy is regulated thoroughly in other chapters of the USMCA. Nevertheless, the lack of specificity and obligations contained in Chapter 8 does not translate into a lack of certainty. International investments made in all three countries comprising North America continue to be protected by the USMCA in other chapters.
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