Mexico-U.S. energy talks to be extended as progress seen, sources say

By Dave Graham

MEXICO CITY, Oct 3 (Reuters) - Talks to resolve a dispute between the United States and Mexico over Mexico's energy policies will extend beyond an initial consultation period as the two sides narrow differences, according to three officials familiar with the matter.

The office of the U.S. Trade Representative (USTR) in July demanded settlement talks on the grounds that President Andres Manuel Lopez Obrador's energy policies discriminated against U.S. firms and violated a North American trade pact.

Under the United States-Mexico-Canada (USMCA) trade deal, if such a complaint is not resolved in 75 days of consultations, a dispute panel can be requested to review claims. That could expose Mexico to the risk of punitive trade tariffs.

However, three officials - from governments on either side of the dispute - said progress made in ironing out differences meant the talks would keep going beyond Oct. 3, when the 75 days expire. The officials spoke on condition of anonymity due to the sensitivity of the matter.

"In my view, the Mexican government has sought to deal with the requests from the U.S. and Canadian governments with a view to a solution that avoids international arbitration," said Francisco de Rosenzweig, a former top Mexican trade official.

Neither Mexico's Economy Ministry nor the USTR's office immediately replied to requests for comment.

At the heart of the U.S. complaint, which Canada joined, are: hold-ups in granting permits; a Mexican electricity law that prioritizes state firms over private ones; and other rules that investors feel disadvantage them, industry sources say.

In the past few weeks, tensions have been eased by decisions by Mexican courts and regulators that suspended contentious rules and signs that Mexican regulators have begun to address frustrations over permits, industry sources and officials say.

With mid-term elections in the United States in November, concerns about inflation acute, and the likelihood that Mexico would lose arbitration, neither side wants to escalate the trade dispute now, the sources added.

Still, one Mexican source said U.S. officials had warned that without substantial progress in the times ahead, pressure on Mexico could be increased again.

Rosanety Barrios, a former Mexican energy official, said while Mexican regulators were trying to give the impression of being more flexible, many issues remained unresolved.

It looked as though instead of reaching a definitive resolution to the dispute, the two sides could "kick the can down the road until the next (Mexican) government," she said. (Reporting by Dave Graham Additional reporting by David Lawder in Washington D.C.; Editing by David Gregorio)