KKR's Monterra threatens arbitration against Mexico; favors negotiation

Monterra Energy has notified the Mexican government of its intentions to launch international arbitration under the North American Free Trade Agreement for suspending the operations of a fuel import terminal in the port of Tuxpan, in the state of Veracruz, in September 2021.

Mexico suspended indefinitely Monterra's operations after the company allegedly failed to provide all the required documentation. Monterra's 2 million-barrel storage terminal, which started operations in July 2021, serves several large clients, including TotalEnergies, Repsol and BP.

Monterra, owned by private equity KKR of the US, filed a "notice of intent" that foresees an initial phase of negotiation and consultation to solve the issue and avoid the need for arbitration, the company said in a statement Feb. 22. Although NAFTA has been replaced by a new treaty, investments made during the life of NAFTA enjoy protection rights.

"Given its desire for an amicable resolution, Monterra invites Mexico to resolve the claims prior to arbitration," the company said in the statement.

Should negotiations fail, Monterra will have no choice but to submit its claim seeking relief, including monetary damages, and possibly interim measures of protection. Monterra said its damages resulting from the government's actions could amount to approximately $667 million.

'Unjustified' closure

Monterra claimed it has always complied with all the legal requirements and that the closure of its terminal was arbitrary and unjustified. During the last five months, the company has repeatedly tried to resolve the issues that led to the closure, including providing "extensive evidence" of its full compliance with legal and regulatory provisions, said the statement.

"We have gone above and beyond to resolve the issue cooperatively," CEO Arturo Vivar said in the statement. However, Mexican authorities have disregarded the evidence, the statement said.

The company also said the closure took place in the context of efforts by the Mexican government to curtail the importation, storage and distribution of oil products by foreign enterprises to restore the monopoly position the state oil company Pemex enjoyed before the liberalization process of 2013.

Surprising move

Observers have consistently warned of the implications of the policies President Andres Manuel Lopez Obrador have taken in the energy sector since taking office in late 2019. However, the magnitude of the response taken by Monterra has raised eyebrows.

Fund managers typically have legal obligations to defend the business, which in many cases involves taking legal actions to protect the investments, Daniel Sanchez, a partner at law firm Baker&McKenzie told S&P Global Platts.

When dealing with the current policies of the Mexican government, companies have had different strategies, but arbitration has so far been seen by many as the last resource, Sanchez said.

"I am a little bit surprised that Monterra is going straight to arbitration," Sanchez said, adding that the company is clearly seeking a more aggressive way of negotiation. If Monterra is successful, other companies might want to do the same to resolve their issues, he said.

Companies in different sectors of the energy industry in Mexico, including power producers, have expressed concerns about the policies of the government, which include a proposal to modify the constitution to increase the dominance of state utility CFE in the power sector.

The complaints have even prompted lawmakers in the US to write roughly 20 letters to presidents Donald Trump and Joe Biden. US Energy Secretary Jennifer Grandholm recently met with the Mexican president to, among other things, address the concerns of US companies.