The U.S. energy industry is hoping that a revamped North American Free Trade Agreement could enhance already booming trade in the continent and boost exports of natural gas.
But as negotiators from the U.S., Canada and Mexico meet again this week to work through remaining disagreements, energy advocates are worried that the mercurial President Trump, fresh off imposing tariffs on steel and aluminum to the chagrin of the industry, could walk away from the treaty, as he has warned.
“If we reach an agreement, I can see energy trade increasing dramatically, but if things fall apart, energy can be a significant casualty because Mexico and Canada are extremely important to the health of the U.S. energy sector, and it would be an unfortunate self-inflicted wound if that happens,” said David Goldwyn, an international energy consultant who served as the State Department’s special envoy and coordinator for international energy affairs from 2009 to 2011.
“We have this incredibly robust trade relationship, and having zero tariffs facilitates that trade,” he added.
The possibility of the deal unraveling, coupled with a proposed rule change that could hamper U.S. energy investments in Mexico and Canada, has some industry officials merely seeking to maintain the status quo.
“Our members believe NAFTA has worked and helped to facilitate the integrated and interdependent American energy markets we have today. Our expectations into negotiations would to be to not undo or change what has worked for our industry with NAFTA. Do no harm,” said Aaron Padilla, senior adviser of international policy for the American Petroleum Institute, the largest oil and natural gas trade group.
API is “gravely concerned,” Padilla said, that U.S. Trade Representative Robert Lighthizer could succeed in his push to eliminate NAFTA’s Investor-State Dispute Settlement process, which allows a business to take legal action through third-party arbitration if a foreign government harms the company’s investment in that country. The Trump administration argues the settlement provision encourages U.S. companies to invest internationally and move jobs overseas.
Those protections matter to all types of industries, especially energy, because investments usually require substantial time to bear fruit, such as the process of exploring, and then producing crude oil in the Gulf of Mexico. Industry fear of removing the settlement provision is heightened as the frontrunner in Mexico’s July 1 presidential election, leftist candidate Andrés Manuel López Obrador, threatens to roll back constitutional reforms from 2013 that opened its formerly nationalized energy industry to foreign investment.
“Mexico is a great example of when the investor settlement provision is so important,” Padilla said. “Our members view the investment environment in Mexico as very favorable. As they look forward, they are seeking to ensure the investments they are making and contracts they are signing with the Mexican government are respected for the long term.”
Republican lawmakers also are urging the Trump administration to tread carefully.
“Pulling the plug on investor-state dispute settlements could potentially lead to American companies declining to invest in Mexico and countries like Russia and China filling the void, jeopardizing U.S. dominance of the global energy market,” said Rep. Will Hurd, R-Texas, whose district spans one-third of the U.S.-Mexico border.
NAFTA, signed in 1993, contains few energy-specific provisions, but the liberalization of Mexico’s energy industry occurred as U.S. oil and gas production began to soar.
The U.S. is now the world’s biggest producer of natural gas and recently became the second-largest producer of crude oil, surpassing Saudi Arabia. Mexico imports more U.S. natural gas by pipeline than any other country, and recent years have seen the buildout of an extensive pipeline network to transport the product.
“The U.S. energy industry, particularly given the oversupply of natural gas, is extraordinarily dependent on the Mexican market,” said Carlos Pascual, the former U.S. ambassador to Mexico from 2009 to 2011. “Mexico has realized the U.S. has some of the lowest natural gas prices in the world. And there is realistically one country in the world that can be connected by pipeline that needs that gas — Mexico.”
Pascual also served as the State Department’s special envoy and coordinator for international energy affairs, succeeding Goldwyn.
He views a potentially renegotiated NAFTA as an opportunity to lock in Mexico’s energy reforms before its July 1 presidential election, allowing continued foreign investment from major oil companies such as Total, Shell, BP and Eni.
“There could be an opportunity to incorporate the provisions of free trade and investment in the energy sector that would further enhance changes made in the [Mexican] constitution and expanded on further through implementing legislation,” Pascual said.
Canada, meanwhile, has its own special energy relationship with the U.S. that is aided by NAFTA.
Canada is the biggest U.S. supplier of foreign oil and a significant net exporter of electricity to America. The country also has abundant supplies of hydropower, which could relieve fuel supply issues in the Northeastern states that want clean energy and are leery of natural gas.
The heavier crude oil produced in Alberta’s oil sands is attractive to Gulf Coast refiners that are built to process heavier crude and in need of a reliable supplier as Venezuela’s production crashes amid financial and political problems.
The fracked U.S.-produced crude oil is lighter and sweeter, and refineries are still adjusting to process it.
In January, the Gulf Coast imported more crude oil from Canada than from Venezuela for the first time, according to the Energy Information Administration.
“Canada is the U.S. security blanket when it comes to oil, gas, nuclear and hydropower,” Goldwyn said. “We are really lucky to have them.”
However, building pipelines from Canada to the U.S. has not kept pace with growing production. That has led to Canada’s crude oil exports increasingly being shipped by rail, with a monthly record set in December, the EIA says.
Perhaps the biggest question in improving pipeline capacity is the uncertain future of the Keystone XL pipeline.
TransCanada is expected to decide soon whether to commit to Keystone XL after nine years of planning and permitting delays. The $8 billion Keystone XL pipeline would ship oil from Canada’s Alberta oil sands to Steele City, Neb., and then on to refineries along the Gulf Coast.
Industry sources say all three NAFTA countries are interested in provisions in a revised pact that would ease the construction of pipelines across borders through permitting reforms.
“We are seeking provisions in NAFTA that might make that whole [permitting] process more predictable for our companies, including measures to increase transparency by regulators,” Padilla said.
A breakdown in NAFTA talks could interfere with planned pipelines to Mexico. Without further pipeline capacity, some industry sources worry booming production in the Permian Basin in West Texas could reach a saturation point, when companies stop drilling because there’s nowhere to send it.
“Mexico is now the number one export market for U.S. pipeline gas, and it’s imperative that NAFTA 2.0 protects a climate to strengthen this relationship,” Hurd said.
Padilla says API is “cautiously optimistic” that a new NAFTA would contain an energy chapter that would address other technical issues important to the industry.
For example, it is seeking improvements to a “certificate of origin” provision that would make it easier for a U.S. company to prove is it importing oil or natural gas from Canada or Mexico to qualify for no tariffs.
The group also wants an adjustment to “duty drawbacks,” in which U.S. refiners that buy crude oil from a non-NAFTA country and then manufacture it into gasoline or jet fuel for export to Mexico or Canada can avoid paying a duty on the original purchase of oil.
Padilla fears the Trump administration is eager to strike a deal too quickly, before the July 1 Mexican election, which is also the day that Trade Promotion Authority expires in the U.S. That authority allows Congress to approve trade deals without any changes, meaning lawmakers can’t amend them.
“These do not rise to being our biggest concerns, but when you give trade negotiations time, you can get to all of these issues,” Padilla said. “We are worried that in a rush to get a deal done, the parties won’t allow for improving the deal in all the ways that it could be.”
