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Indigenous consults slow Mexico’s energy plans

12 Apr 2018 16:56 (+01:00 GMT)
Indigenous consults slow Mexico's energy plans

Mexico City, 12 April (Argus) — Mexico's indigenous consultation process is the main risk factor for energy projects, said one law firm representing clients with delayed investments.

"The indigenous consultation is the issue that is putting the energy reform at risk," Hector Garza, a partner at the Mexico City-based law firm Ritch Mueller, told Argus.

Companies looking to develop energy and infrastructure projects in Mexico are required to participate in an indigenous consultation process prior to applying for permits related to projects that could significantly impact an indigenous community, Garza said.

The energy ministry, or when relevant the transport ministry, decides when a consultation may be required. This would include if a proposed natural gas pipeline or wind farm is likely to displace indigenous people from traditional or sacred land.

The indigenous consultation is not a complexity of project development only in Mexico. It applies in any country with an indigenous population, according to the International Labor Organization's Agreement 169. But two factors have converged in Mexico that are making the issue more urgent — the prospect of the first supreme court decision on the matter, and a flood of pending projects and investments flowing from the historic 2014 energy reform

In January, the Mexican supreme court decided to review the indigenous consultation process carried out for the Eolica del Sur wind farm project in Juchitan de Zaragoza, Oaxaca state.

This makes it "the first big case about the indigenous consultation in the history of the country," Garza said.

Japanese firm Mitsubishi is developing the 396MW capacity project, formally known as Marena Renovables, and it has long-term power purchase agreements in place with companies including local conglomerate Fomento Economico Mexicano (FEMSA). The project was originally slated for completion in 2013 but five rounds of legal action, including the current case before the supreme court, have delayed development.

The communities bringing the legal action claim the developer was awarded operational permits by the energy ministry and approval of the environmental impact statement by the environment ministry prior to the launch of an indigenous consultation.

"The right to consultation cannot just be a simple administrative task, a simple box-ticking exercise in order to get the green light to start project implementation," Ricardo Lagunes, the lawyer representing the indigenous communities bringing the case, told Argus.

Instead, the consultation process must be part of early project design, where the energy ministry has an obligation to create "an equal playing field" between the indigenous communities and the deeper pockets of the developers, Lagunes said.

In the Eolica del Sur project, the developer did secure approval from a majority of those consulted, albeit not within the required time frame, but more than 1,000 additional claimants have brought the latest case.

The supreme court will therefore have to rule on the extent of the consultation required in order for a developer to discharge its duty to consult, said Lagunes.

Construction of the wind farm has continued throughout the legal process. If the case before the supreme court is decided against the project, the developers will be required to reapply for an environmental permit, said Garza. He has been a long-time adviser to various project participants.

"The case will set a precedent about how to carry out a consultation properly, where the company, the community and the government work hand in hand," Fernando Zendejas, deputy electricity secretary at the energy ministry said at a recent energy conference in Mexico City.

The Eolica del Sur wind farm is just one of many projects in the renewables and natural gas space that are delayed because of contested indigenous consultation processes.

Recent tenders for oil and gas exploration and production have not attracted the need for indigenous consultation as they are mainly off-shore or in existing and established Pemex sites. Some new tenders for on-shore shale exploration along Mexico's northern border may be more likely to have to meet this requirement.

Projects that won long-term PPAs in the first power auction held in 2016 are scheduled for completion in the fourth quarter of this year, but a significant percentage of those projects are not expected to come into service either at all or on time, predominantly because of local opposition.

Mexico has so far awarded 19.8mn MWh of energy supply in three long-term power auctions in 2016 and 2017, mostly to CFE but also to private companies Iberdrola and Menkent, associated with Mexico's cement giant Cemex.

Leopoldo Rodriguez, president of the Mexican wind energy association (Amdee) previously told Argus that some 30pc of new wind power capacity contracted in the first long-term power auction will not be built on time.

Garza estimates that around 20 projects, including highways, natural gas pipelines and renewables, across the country are stalled because of the indigenous consultation process, with Oaxaca, Yucatan and Puebla states the most turbulent.

"The panorama is not very clear for the projects that are halted," Garza said. "Their completion is not impossible, but the election year is a complicating factor." Mexico elects its next president on 1 July.

Opposition from indigenous communities is also impeding conclusion of four natural gas pipelines.

CFE tendered construction of 25 new natural gas pipelines during the current administration. While 12 of the tendered pipelines are already operating and 13 are under construction, legal action initiated by indigenous communities is currently holding up the conclusion of four pipelines.

Work on parts of TransCanada's Tuxpan-Tula and El Encino-Topolobampo pipelines, as well as IEnova's Guaymas-El Oro pipeline and ATCO's Tula pipeline are all suspended pending the resolution of legal action relating to the indigenous consultation.

While due diligence is the key to avoiding difficulties with the process, says Garza, some developers are deliberately avoiding areas of the country where a consultation may be likely.

"It was a choice not to offer projects that required the indigenous consultation process. We would not have been able to deliver it on time," said Gerardo Cervantes, energy manager at developer Enel at a recent conference in Mexico City.

But the length and location of new natural gas pipelines make avoiding the indigenous consultation process impossible, Garza said.

While the number of projects that require indigenous consultation is small, Garza has worked on just over half of the 10 consultations that have been completed in Mexico. Dealing with the process is time consuming and saturation in the energy ministry has further delayed project execution, say industry members.

The delays are disheartening for investors, says Garza, and he wishes that government, at a state and municipal level, would do more to facilitate the process.

The 2014 energy reform that ended state-owned Pemex and CFE's monopoly on the oil, gas and power sectors has resulted in more than $9bn in committed investment across 65 new renewables projects and $4.1bn investment in new natural gas pipelines.

Certainty on the indigenous consultation will be required to secure those investments, Garza said.

Rules governing the process exist, but they are dispersed among various authorities, both domestic and international, he added. Dedicated regulation would be preferred, but it would require a constitutional amendment and federal- and municipal-level legislation. He expects little change in the short-term.