Experts: NAFTA offers advantages to U.S. oil and gas industry

By Staff | September 11, 2017

With two rounds of negotiations over the North American Free Trade Agreement (NAFTA) completed and a third round scheduled for Sept. 23-27 in Canada, what are the potential consequences for the U.S. oil and gas industry?

President Donald Trump has the power to withdraw the U.S. from NAFTA and has threatened to do so. But last month, the American Petroleum Institute (API), the Canadian Association of Petroleum Producers (CAPP) and the Mexican Association of Hydrocarbon Companies (AMEXHI) released a joint paper outlining their shared policy positions on NAFTA.

Two trade experts who cofounded Monarch Global Strategies (MGS) LLC—a consulting firm that advises companies conducting business in the Americas—provided North American Shale Magazine with their insights on what NAFTA means to the U.S. oil and gas industry and energy infrastructure.  

James R. Jones, MGS chairman—a former U.S. ambassador to Mexico during the Clinton administration and former congressman from Oklahoma—played a role in implementing NAFTA. He now focuses on international trade, investment and commerce, business-government relations and financial services. Michael Camuñez, MGS president and CEO, served as an assistant commerce secretary for market access during the Obama administration. He advises U.S. companies in domestic and global markets.

Has the U.S. shale revolution caused America’s energy industry to rethink how it views NAFTA? If so, why?

Mexico has become a major client for American energy companies: they are now supplying more than 80 percent of Mexican natural gas. Mexico also imports a lot of shale oil—the super lightweight crude Mexico needs to mix with its super heavy Mayan crude. I think it’s fair to say that Mexico is now viewed not only as a critical export market but also a strategic market generally for the development of new shale and other energy resources essential for North American energy independence. And, of course, Mexico has its own extensive but untapped shale resources, which creates significant opportunities for American energy firms to bring their technology and know-how in a win-win effort to tap new resources for Mexico and North America.

All this market activity and potential is dependent on the continued industrial, commercial, and retail growth of Mexico, which in turn greatly depends on a strong and robust free trade system with the U.S. and Canada. To undermine or cancel NAFTA would damage these natural gas/energy markets and their growth, and ultimately U.S. (and mostly Texas) natural gas firms. Perhaps more than ever the U.S. energy sectors view NAFTA as the essential vehicle (catalyst) for greater market access in Mexico.

Because of some carefully structured language in NAFTA, which left open the possibility of the prospective incorporation into the agreement of any new sectors that Mexico may liberalize after the agreement went into effect, the liberalization brought about by the Mexican energy reforms are actually covered by NAFTA, which makes the agreement very important to American investors in the sector. The industry has thus made clear that any renegotiation should “do no harm” to the important protections already established under NAFTA. So while a new or revised energy chapter may or may not materialize, NAFTA already represents important interests for the energy industry that they don’t want to see undermined.

What was your reaction when the American Petroleum Institute, the Canadian Association of Petroleum Producers and the Mexican Association of Hydrocarbon Companies released a joint paper outlining the shared policy positions they support on NAFTA?

First, the issuance of a joint statement reflects the significant consensus in and deepening of the North American energy industry, something that might not have been conceivable in years past. We welcome the thoughtful and inspiring position paper. The “Do no harm” and “Trilateral NAFTA” principles advanced by the papers should be kept strongly in mind by U.S. negotiators during the talks. Our region benefits from the competitiveness we achieve together in the face of other regions. The paper is also correct in signaling that there are risks in revisiting an agreement that has worked well for over 23 years, so updating it to reflect the changes that have happened over that time makes sense, but our countries must be prudent. Any mistakes will surely have economic and geopolitical impacts.

The paper also hints at the geopolitical consequences of making mistakes during the renegotiations, as NAFTA “reduces all three countries’ reliance on energy supply from other regions,” helping defund regimes that hold different values from those that govern us, like Venezuela and Iran. Our countries’ shared values should have a specific weight when energy security is concerned.

How might the U.S. oil and gas industry’s support for NAFTA cause the Trump administration to rethink its position on the trade agreement?

One of Trump’s main reasons for revisiting NAFTA is the U.S.-Mexico trade deficit. But the U.S. oil and gas industry is actually benefiting enormously by Mexico’s postponement of opening the energy markets to private participation: Mexico imported $5.45 billion dollars just in fuels in the first five months of 2017, mostly from the U.S. In 2016, U.S. companies exported natural gas for almost $4 billion dollars to Mexico. From an energy perspective, the U.S. has a large a trade surplus ($11.5 billion USD) with Mexico. In 2016, the total value of U.S. energy exports to Mexico was $20.2 billion, while the value of U.S. energy imports from Mexico was $8.7 billion. (U.S. Energy Information Agency).

This situation will continue to grow in the near future: even with the success of Mexico’s Rounds 2.2 and 2.3, it’ll be years before the country is able to meet its growing demand for natural gas (expected to grow 31 percent by 2029). Last year, Mexico’s production of natural gas declined 10 percent. Mexico will continue to be a very attractive market for US companies.

The opportunities lie not only in exports, but in infrastructure as well: The U.S. has 17 cross-border pipelines with Mexico, and four more are under construction.

With all of this said, the administration has shown a concerning propensity to disregard the input of private industry, including arguments that are based on sound evidence and experience. Ideology, more than principle, seems to drive their decision making. In this sense, it’s hard to say, objectively, whether the oil and gas industry’s concerns will ultimately find an audience in the White House.

What would be the net effect on the U.S. oil and gas industry if the Trump administration cancels NAFTA as threatened?

Energy is the lifeblood of markets and almost all forms of commercial activity. We fear the cancellation of NAFTA could cause a significant adverse impact on each of the three economies, disrupting established supply chains all over North America. With a diminished industrial activity, less demand would trigger lower prices of oil and gas products caused by excess supply in the U.S., and the region could lose its competitive edge in front of other integrated markets.

More specifically, the cancellation of NAFTA would create tremendous uncertainty on the part of energy investors, who we suspect would have serious concerns about placing hundreds of millions, if not billions of dollars of capital at risk in Mexico without recourse to the investor protections prevalent under NAFTA. Moreover, the rules governing energy trade would revert to the GATT-bound rates, as is the case with the rest of cross-border trade, which average 4 percent for the U.S., and for most goods it is 2.5 percent. For Mexico, the average is 35 percent.  This means petroleum products could face substantial taxes upon export to Mexico and Canada.

What energy-related aspects of NAFTA might be renegotiated to the benefit of all countries involved?

There are myriad steps the negotiators could find to further promote North American Energy integration and independence:

· First, new disciplines on state-owned enterprises (SOEs) could help ensure that the former monopolies CFE (power) and Pemex (hydrocarbons) will be obliged to compete on a level playing field and act according to market principles. This could be a major step forward in locking in and advancing the Mexican energy reforms as they relate to these state-owned companies.

· Next, although there are robust efforts related to regulatory and policy cooperation and integration, this area could be significantly strengthened further via institutional commitments under NAFTA.

· Substituting a “NAFTA regional” content requirement in lieu of the existing Mexican 35 percent national content requirement would most likely foster further technology transfer and supply chain integration in North America.

· Facilitating cross-border trade of oil and gas goods, including trucking and railway, could be strengthened.

· The promotion of greater connectivity, shared standards and protocols in the power sector could advance North American electricity integration.