Mexico reaches deal to settle pipeline contracts dispute

Mexico’s president Andrés Manuel López Obrador, flanked by the country’s richest man Carlos Slim, claimed a major victory in a dispute over pipeline contracts that he said would result in $4.5bn in savings for the state and pave the way for major private sector investment in a large-scale infrastructure plan.  The deal reached on Monday night resolves a bitter battle over pipeline contracts signed by the state electricity company, CFE, before Mr López Obrador took office last December, which his government claimed were “exorbitant and unfair”. The dispute had threatened fragile business confidence by raising the prospect that the government would not honour contracts with which it disagreed. While the contracts were, in the end, renegotiated, Carlos Salazar, head of Mexico’s powerful CCE business lobby, called it a “win-win” for all sides. Mr López Obrador told his daily news conference that the new contracts — which lower tariffs for transporting gas in a series of major pipeline projects with US, Canadian and Mexican companies — were beneficial to all sides and praised business leaders for their goodwill.  The president had spooked investors before taking office last December by scrapping a $13bn airport project in which Mr Slim had been a leading investor. But Mr López Obrador singled out the telecoms mogul for particular praise on Tuesday, saying he had been the first to sign on to the new pipeline terms. That agreement by Carso Energy “set the tone” for IEnova, a unit of US company Sempra Energy, and Canada’s TC Energy to follow suit, Mr López Obrador said. Fermaca, a Mexican company, was still in negotiations. Full details of the deal were not immediately available, but Mr López Obrador said the companies had agreed to a roughly 30 per cent reduction in their profits. The resolution of the dispute, which the CCE had escalated last month by initiating international legal action, paves the way for a key subsea pipeline carrying cheap US gas from southern Texas to Tuxpan, built by TC Energy and IEnova, to start operations “in a week at the most”, the president said.  “I think it’s very positive that today we are in a different place, that there’s a different tone,” said Pablo Zárate, managing director of FTI Consulting and an energy expert. “This was not the only problem for business confidence, but it had become a major one . . . Today we have a happy ending, but this is a situation the government created.” The deal comes just days before Mr López Obrador’s first state of the nation speech on September 1, in which he will emphasise how he has delivered on campaign promises, including social programmes and higher minimum wages.

But promises of stronger growth have failed to materialise. Revised gross domestic product data published last week showed zero growth in the second quarter, after a small contraction in the first quarter, pushing Latin America’s second-biggest economy to the brink of a technical recession as investment remains on hold.  Mr López Obrador has promised to lift Mexico’s stubbornly sluggish historical growth rates to 4 per cent a year during his presidency. “Growth may be zero, that doesn’t matter. The important thing is that there hasn’t been a lot of investment and that it is now imminent, even starting this year,” Mr Slim said, saying there were opportunities in hydrocarbons, road, water, education, health, ports and airport projects.  Mr López Obrador said the government would soon announce a national infrastructure plan but gave no details. Marco Oviedo at Barclays in New York said he was not convinced the resolution of the pipeline dispute would be enough to kick-start investment. “Probably doing something market friendly on Pemex might,” he said, referring to the troubled state oil company that the president has blocked from pursuing joint-ventures with the private sector. Mr López Obrador said it was “very important” that Mexico had averted an international legal process “that would have taken years and generated a climate of distrust towards the Mexican government and economy at a time when we need national and international investment to achieve higher growth”.  Ultimately, he said, consumers would benefit. “This will enable us to maintain our policy of not increasing electricity prices,” he said.