Since August 2017, Canada, Mexico and the US have conducted 7 rounds of renegotiations on the North American Free Trade Agreement (NAFTA). The deal encompasses 20 industry sectors. How much is at stake for the energy sector?
The continent is rich in natural resources and the 3 nations’ energy interdependence and cooperation have continuously reinforced since the beginning of the 20th century when the US started trading electricity with their neighbours.
In 2016 Canada had become the US top crude oil supplier surpassing all OPEC countries combined, whilst Mexico ranked 4th in crude oil exports to the US. Canada is also the US top crude oil importer receiving two thirds of all US crude oil exports. As for gas, Canada largely dominates the US gas imports market, whilst the latter exports most of its gas to Mexico via pipeline.
Despite Trump’s repeated threats to terminate NAFTA, the 3 parties are still striving for a common agreement to save the precious deal. But how useful is NAFTA in energy trade between the 3 nations and what do they disagree on?
Chapter 6 guarantees national treatment is applied to all three countries’ energy goods, and exempts them from export tariffs unless such tariffs are placed on all 3 NAFTA members. Protectionist measures such as unfair import tariffs on imported goods from other Parties are prohibited by chapter 19.
Not surprisingly, Trump Administration has proposed to eliminate this chapter, whereas both Mexico and Canada want to keep it as this chapter represents a key protection for Mexican and Canadian goods against the US Department of Commerce.
The other point stirring debate is chapter 11 “Investor-State Dispute Settlement.” It orders fair compensation to private investors of one NAFTA Party if their assets are nationalised by another Party, and allows them to initiate arbitration against that government.
These protections are vital to the US energy sector. The American Petroleum Institute, the US Chamber of Commerce and US energy companies are all lobbying to retain them. Why are these protections crucial to foreign companies investing in Mexican oil and gas?
Until recently Mexico’s oil and gas were controlled by state-run Petróleos Mexicanos (PEMEX). The 2013 Energy Reform broke PEMEX’s monopoly and allowed domestic and international private investors to take part in 9 auctions for oil and gas blocks. This reform is expected to bring desperately needed investments in the exploration and exploitation of Mexican shale oil and gas. Last February alone an auction secured $93 billion in investments spread over the next 35 years – duration of the contracts.
Nevertheless, Mexico has a long history of fossil energy nationalism. The risk of nationalisation of foreign companies’ assets remains and cannot be ignored. PEMEX itself is the result of the first ever nationalisation of foreign oil investments in 1938. History has already shown Latin American governments privatising and renationalising their natural resources, the latest one is Argentina which privatized its oil in 1992 only to renationalise it in 2012.
To protect themselves from expropriation without compensation, US energy companies need chapter 11. Without it, the prevailing legislation would be the Mexican Hydrocarbons law of 2014 which entitles the Mexican government to apply rescisión administrativa. The latter allows the government to “rescind exploration and exploitation contracts with private investors without paying any compensation,” as explained on Kluwer Arbitration Blog. It also grants Mexican federal courts exclusive jurisdiction in arising disputes.
Currently, under NAFTA article 1110 the Parties cannot nationalise private investors’ assets without paying them fair compensation, and this article cannot be included in the Parties’ reservations. Besides, under Mexican law and the Vienna Convention, as long as Mexico remains in NAFTA it cannot invoke domestic law to justify not paying private investors compensation for nationalising their assets.
This point is so crucial for energy companies that they are already threatening to stop supporting the NAFTA renegotiations if these protections are eliminated, and given the influence these businesses enjoy in the US Congress, they could prevent a new NAFTA.
The Trump Administration aims to withdraw such protections to dissuade US companies from moving jobs and investing abroad. However, as Albright Stonebridge Group senior vice president Antonio Ortiz-Mena pointed out, the protections included in chapter 11 have a dual understanding. According to him, “when the US Trade Representative thinks about [eliminating these protections], it’s thinking about the auto industry […] but in the case of energy, you invest where the oil is […] if there is oil in the Gulf of Mexico and you want to invest in deep sea drilling, it’s not as if you could do that in Detroit.” Could Washington propose to apply these protections only to the energy sector, and would US industries and lobbying groups, and Mexico and Canada agree?
Should the deal be terminated NAFTA Parties have a lot to lose in energy trade. Analysts like Albright Stonebridge Group senior director Juan Carlos Hartasanchez consider that energy does not represent “a big enough common interest” for the 3 Parties to finally come to an agreement. However, the opening of Mexico’s oil and gas represents a strong incentive for the 3 Parties not to terminate NAFTA: for the US which wants to reduce its dependence on far away unpredictable nations in the Middle East, for Canada which wants to keep exporting oil and gas to the US, and for Mexico which needs its 2 partners’ investments, technology and skilled labour to develop its shale oil and gas. Mexico sits on an estimated 15 trillion cubic meters of technically recoverable shale gas, the exploration of which is partly hindered by the lack of deep sea drilling technology. As champions in developing unconventional gas, US companies are probably the best able to develop Mexico’s shale gas.
Diane Pallardy studied an MA in Politics and International Relations at the University of Kent, and MA in World Politics and Fossil Energy at the Higher School of Economics, in Moscow.