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U.S. Energy Secretary Rick Perry (right) at a meeting in Mexico City with Mexican President Enrique Peña Nieto on July 13, 2017. (Photo: Mexican Government)
Wednesday, July 26, 2017

NAFTA Talks: A New Energy Strategy?

NAFTA can help align the parties to form a united North American energy hub.

Inter-American Dialogue

U.S. Energy Secretary Rick Perry in late June said he believes the upcoming renegotiation of the North American Free Trade Agreement presents an opportunity to create a “North American energy strategy” with Mexico and Canada. His statement suggests a softer U.S. approach to renegotiating the agreement, which President Donald Trump previously called the “worst trade deal” ever signed by the United States. What is the outlook for North American energy integration amid the backdrop of NAFTA renegotiations? Which sub-sectors within the energy sector show the most promise for further integration among the United States, Mexico and Canada? What’s most at stake for each of the countries in terms of energy, and how will the NAFTA talks on the issue likely play out?

Jeremy M. Martin, vice president for energy and sustainability at the Institute of the Americas: Fortunately, the rhetoric has become more tempered, including a more measured approach to NAFTA and renegotiations. Across all three countries, there is a level of maturity, extensiveness and cooperation that is underpinned by flourishing energy trade and commercial engagement. The United States and Canada have long been highly integrated, while Mexico and the United States have grown increasingly interconnected. If these trends continue, North America is well-positioned as a global energy power, which will have important effects on the region’s economic competitiveness. Most notable in the last several years have been the developments surrounding natural gas. U.S. pipeline exports to Mexico more than doubled since 2013, increasing by 29 percent to a record 1,357 billion cubic feet (Bcf) in 2016. Meanwhile, energy exchange between Canada and the United States also surged ahead as more than 97 percent of U.S. natural gas imports come by pipeline from Canada; at the same time, Canadian imports increased by 11 percent to 2,912 Bcf in 2016. At the same time, U.S. pipeline exports to Canada increased by 10 percent to 771 Bcf. But the growth in oil and refined product trade as well as the march of renewables also bear noting. Indeed, the United States now exports just under 1 million barrels a day of crude oil and petroleum products to Mexico, hugely altering what had long been one-way trade in oil. On renewables, the energy ministers of Mexico, the United States and Canada signed the Clean Energy Working Group memorandum of understanding in 2016 and also set a goal for North America to have 50 percent clean power generation by 2025. There should be little doubt that the size and scope of North American energy trade offers a compelling business case for not upsetting the proverbial apple cart.

Steven P. Otillar, partner Akin Gump Strauss Hauer & Feld, LLP: With the backdrop of President Trump calling NAFTA the ‘worst trade deal ever signed,’ there should be no debate that energy has not been fully addressed in NAFTA. Mexico, for example, exempted energy from NAFTA when it was first approved, due to its then-existing constitutional restrictions. In light of constitutional reforms in Mexico, unconventional shale development in Canada and the United States, and changing political tides, it seems that energy is now fair game for coordination with the rest of North America. Energy integration in North America is actually well under way. Crude oil exchanges have taken place between the United States and Mexico, even when the U.S. crude oil export ban was still in place. President Trump already approved the Keystone pipeline to bring crude oil from Canada to the United States, and additional approvals have continued, including the issuance of another presidential permit last week for a pipeline that can transport up to 108,000 barrels per day of refined products from the United States into Mexico. The United States currently exports a substantial amount of natural gas to Mexico, with some economists saying that exports contribute at least 40 cents per mmcf of the price of natural gas in Texas. Currently, there are more than 12,000 NAFTA comments that are being reviewed, and Mexico just opened its notice and comment period last week. Contrary to initial indications from the administration, it appears that the United States may be willing to include an energy chapter in NAFTA (even though the U.S. administration declined to do so in negotiations with the European Union with respect to the TTIP). With this backdrop, imports and exports of natural gas, refined products, and the ability to develop and transport hydrocarbons will be of key importance. As a net energy exporter, North American countries should be aligned on facilitating movement of expertise, equipment and resources among themselves, while enabling exports of crude oil, refined products and LNG. NAFTA can serve a central role in this process, and help align the parties to form a united North American energy hub.

George Baker, publisher of Mexico Energy Intelligence in Houston: ‘North American energy integration’ is a term that allows for loose and tight interpretations. Let’s try the tight one. ‘Integration’ may refer to commerce or public policy, with regard to offshore safety, for example. As for commerce, integration should refer to competition and cooperation among parties that are equal before the law and whose access to capital is not favored or disfavored by their relationship to a government. Manifestly, the energy relationship between the United States and Mexico does not meet these two standards. Pemex is legally an agency of the Mexican government that happens to be mandated to explore for, produce, refine and sell hydrocarbons and petrochemicals. As such, it is not the legal equal of other oil companies. Further, its status means that it is not legally able to operate in the U.S. Gulf of Mexico where, as operator, it would be eligible for membership in the Center for Offshore Safety and in the Marine Well Containment Company. These limitations mean that the integration of safety regimes in the U.S. and Mexican portions of the Gulf of Mexico is currently impossible. There is a second inconvenience: as far as I know, Pemex continues to enjoy the right to invoke sovereign immunity, as it did successfully to avoid liability in the litigation over the Ixtoc-1 oil spill of 1979-1980. A third inconvenience is the implied sovereign guarantee of repayment. Any commercial arrangement by Pemex, CFE, PMI or any of the energy regulators has an implied sovereign guarantee of repayment. Having Pemex or CFE as an anchor customer for an infrastructure project may confer an advantage of as much as 400 basis points as compared to another prospective borrower with a similar project that is independent of these government agencies. These legal asymmetries and commercial inconveniences must go away if energy integration is to become more than just a slogan. One corrective measure, which we propose, would be the creation of a second national oil company in Mexico with a mixed-capital structure; this measure alone could come to make all oil companies in the Gulf of Mexico equal before the law.

Remi Piet, senior director at Americas Market Intelligence: The upcoming renegotiation of NAFTA could indeed offer an opportunity for a common North American energy security strategy. The original deal excluded the energy sector because of restrictions to foreign investment in Mexico that have since been mostly lifted. Despite these limitations, energy relations have deepened between the three countries. The dynamics of energy supply and demand have dramatically shifted over the past decade, mainly due to the shale production revolution in the United States, which places the region on the path to self-sufficiency by 2020. The United States and its immediate neighbors have become strongly interconnected for crude oil, refined products, natural gas and electricity, with Mexico topping the list of recipients of U.S. exports of natural gas in the world. However, a series of obstacles hamper the strengthening of energy relations within NAFTA. President Trump’s populist and simplistic foreign policy toward Mexico has antagonized many across the border. The developing LNG supply glut, reinforced by Qatar’s decision to hike production by 30 percent while slashing prices to secure market share over the next five years, might further encourage Mexico to turn toward another supplier. Finally, a harmonization of regulatory rules across borders is needed to reduce political and economic risks for suppliers. Standards of modernization and harmonization, including human capital development and best practices on environmental matters, are essential to supporting further energy sector integration. The stubborn and regressive position on climate change mitigation from the Trump administration deprives NAFTA of a key engine for energy integration on the continent: innovation in renewable energy and integrated grids.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor


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