Mexico & Nafta - March 2011 (ISSN 1741-444X)

On 12 February the Partido Revolucionario Institucional (PRI) mayor of Ensenada, in Baja California Norte, ordered the closure of the regasification plant, Energí­a Costa Azul de Ensenada. His attempt to close the plant was thwarted by the state government and the federal government.

Luckily, there was no confrontation between federal and municipal police at the plant, because the municipal police withdrew. Enrique Pelayo, the mayor of Ensenada, has however started a legal action to get the plant closed.

The plant, which is the product of US$1.2bn in foreign investment by Sempra in San Diego, California, takes liquefied natural gas shipments from Asia and Peru and reconverts them into gas, some of which is used in Mexico but most of which is pumped across the border into the US. Lack of electricity in the north of the Mexico has been a handicap for industry for years. The Sempra plant, which began operating in 2008, went some way to dealing with that problem.

The row is politically important for two reasons. First, Pelayo is a newly elected and ambitious mayor (he took office at the end of November 2010) and believes that he has a mandate to shake things up. He claims that the Sempra plant does not have proper authorisation from the municipality to operate. Sempra, and the federal government, argue that the plant does not need authorisation from the municipality and that the two permits it does need, for land use and current operations, are in order and up to date. Sempra said that it had not yet presented these documents, simply because Pelayo and the municipality had yet to ask for them.

Pelayo retorted that the city council had asked him to investigate the company's environmental and municipal permits. He argues that there is no environmental impact study on the local environment nor is there planning permission for the pipelines leading to and from the plant. He further argued that the plant does not have its own dedicated security equipment. He said that this omission contravenes city requirements. A federal court will now settle the issue of the permits.

The second reason the dispute is important is that Sempra has reacted by cancelling a proposed US$3.5bn regasification plant at La Rumorosa, Baja California. This project would have produced 1bn cubic feet of gas a day. The company said that it had been forced to take the decision amid a lack of judicial certainty that it would actually be allowed to run the plant once it had made the investment. The company had already begun acquiring the land needed for the project.

It is worth noting that the Costa Azul plant is still operating under the guardianship of the federal police and the army. Both the (federal) Secretarí­a del Ambiente (Semarnat) and the Comisión Reguladora de Energí­a (CRE) insisted that the plant has all the requisite permissions to operate. The CRE also pointed out that gas storage is constitutionally regulated at the federal rather than at municipal level. The Comisión Federal de Electricidad has commented that if the plant is closed, blackouts and brownouts along the coast of Baja California and in Tijuana, Ensenada and Mexicali are inevitable.

The crisis in Ensenada is worrying major energy companies. Shell's sale of its regasification project in Altamira, Tamaulipas, is now in limbo because of what has happened in Ensenada.

Sempra executives have told the Mexican press two things. The first is that Pelayo will drop his legal action if US$16m (some say US$60m) is paid into certain accounts. Sempra alleges that Pelayo is being egged on or backed in the dispute by the family which previously owned the land on which the plant sits.

The second, more worrying, point is that these same executives say that Sempra has equally big investments in Peru and Chile but in neither South American country has it faced such a threat to its business.

Baja California is reeling from other problems. One is the endemic drug violence along the northern border. Another is the determination of the federal vehicle registration agency, Siave, to clamp down on the smuggling of used vehicles across the border into Mexico. This has led to long queues of vehicles at major crossing points, deterring cross border jaunts by Californians. Baja's tourism industry has also been affected by anti-money laundering rules, which have deterred US citizens from travelling to Mexico with cash.

• Vehicle exports in January set a new record of US$5.04bn, up 22% on January 2010. Overall manufactured exports in January were up 25%.