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By Brian Dabbs
The U.S. should ensure that any renegotiation of the North American trade pact, a favorite gripe of President Trump’s on the campaign trail, preserves recent strides in U.S. access to the Mexican energy sector, a range of energy specialists told Bloomberg BNA.
Unexplored oil and natural gas reserves in the Mexican areas of the Gulf of Mexico will likely fill the coffers of U.S. industry in the coming years after a historic competitive oil auction in December 2016, said the specialists, including a key architect of the North American Free Trade Agreement energy chapter.
Increased bilateral energy integration continues to provide a boon to U.S. natural gas and oil exporters. Amid rising U.S. domestic production, Mexican energy imports are plummeting, and U.S. refined petroleum and natural gas exports have increased dramatically during the past six years, the Energy Department said in early February.
“I know that a number of companies in Texas have some concern that that gets highlighted in any kind of discussions that take place in the future,” Deborah Byers, an energy specialist with Ernst & Young LLP based in Houston, told Bloomberg BNA.
President Trump pledged an overhaul to the trade pact on the campaign trail, calling it “the worst trade deal in history.” But the White House hasn’t proposed any concrete changes to the deal since his inauguration, and U.S.-Mexican relations have degenerated to historic lows following the Trump administration’s immigration rhetoric, border wall proposal and apparent plans to put in place a goods adjustment tax at border crossings.
Mexican crude oil exports traditionally have been the linchpin of bilateral energy relations, but the country is grappling with more than a decade’s decline in oil production.
Mexico had less than $10 billion in energy exports—most of which was crude oil—to the U.S. in 2016, marking a roughly fivefold reduction since 2011, according to the Energy Department. Meanwhile, U.S. energy exports to Mexico spiked more than threefold between 2006 and 2011 before plateauing,, then slightly declining. The U.S. exported nearly $20 billion in energy products to Mexico last year.
U.S. natural gas exports are a critical portion of the shipments, based in part on Mexico’s drive to cut down on harmful greenhouse gas emissions, the industry specialists said. But a professor and a researcher with Columbia University’s Center on Global Energy Policy jointly penned an article that suggested Trump may cut off natural gas exports as a bargaining chip to coerce Mexican concessions.
That prospect has sparked debate, but Sarah Ladislaw, energy expert at the Center for Strategic & International Studies in Washington, described such a stance as likely bluster.
“I think that may be a little far afield for the administration unless they want to start a trade war,” Ladislaw told Bloomberg BNA.
The White House and the Office of the U.S. Trade Representative didn’t respond to Bloomberg BNA’s request for comment.
An annulment of the pact would render U.S. natural gas exports more difficult due to current export policy to non-free trade agreement countries.
Meanwhile, Mexico’s top trade negotiator, Economy Minister Ildefonso Guajardo, told Bloomberg L.P. Feb. 27 that his country would cut off NAFTA renegotiations if Trump insists on basic tariff hikes. Energy trade currently is covered in NAFTA’s investment and services chapter, whereas tariffs are typically addressed in the market access sections of trade pacts.
Mexico was virtually exempt from energy negotiations in NAFTA, which entered into effect in 1994. Mexico’s Constitution prevented foreign development of domestic resources, but sweeping constitutional changes in 2013 liberalized the sector. Petróleos Mexicanos (Pemex), the state-owned Mexican fossil fuel company, operated a 75-year monopoly in the energy sector until those constitutional changes were finalized.
And in early December 2016, Mexico awarded deepwater development rights to Chevron Corp., Exxon Mobil Corp., Total SA and China-owned CNOOC Ltd. in its competitive oil auction.
“Pemex has a well-documented, longtime decline in their production. That’s not sustainable,” said Ernst & Young’s Byers, pointing to the need for new development to increase production. “That money is going to come in [from] somewhere.”
Australia-based BHP Billiton Ltd. secured a joint venture with Pemex to develop the Gulf’s Trion block—a leaseholding area for oil exploration.
Still, increased access and certainty could be on the table in future negotiations, said David Pumphrey, who represented the U.S. Energy Department in NAFTA negotiations and is now retired.
“Both sides would want to seek changes, and Mexico can’t go back to the state-run energy industry it has had in the past,” Pumphrey told Bloomberg BNA. “I would want to look at that ‘What can we do to get more access and certainty in the oil and gas sector?’ I’d throw that in the hopper and see what they’d want in exchange.”
The current statute, in fact, would aid Trump’s bid to renegotiate the deal as long as he garnered support from Republicans in Congress. Former President Barack Obama signed Trade Promotion Authority into law in 2015. That statute ensures expedited legislative procedures and an up-or-down vote in both houses of Congress for all trade agreements.
The law expires in mid-2018, but lawmakers could extend it for three more years.
Both Pemex and the Mexican Economy Ministry, which handles trade, didn’t respond to multiple Bloomberg BNA requests for comment.
A reworked NAFTA conceivably could strengthen pipeline infrastructure on the U.S.-Mexican border and facilitate integration of electricity transmission, the energy specialists said.
Matthew Rooney, director of economic growth at the George W. Bush Presidential Center and a former State Department economic adviser, called for a comprehensive North American infrastructure plan aided by a financing center, pointing to NAFTA as a potential forum to execute that.
“Here you have enormous opportunities for cross-border integration,” Rooney said at a Feb. 27 event in Washington. “Mexico is a low-cost energy producer, and therefore there are opportunities for greater efficiency and reducing cost across the North American space.” The U.S. State Department’s current vetting process for pipeline approvals hinders regional development, Rooney said, adding that pipelines should be presumed to serve the national interest.
But due to the energy overhaul underway in Mexico, Byers said the Mexican government is still putting in place a regulatory framework to approve such projects. “You’re effectively having to stand up a [Federal Energy Regulatory Commission]-type regulatory structure from scratch,” she told Bloomberg BNA. “There’s a lot going on. Nothing moves as quickly as businesses want, but in my view, it’s moving quite rapidly.”
A statement following a mid-February summit between Trump and Canadian Prime Minister Justin Trudeau called for “deepening” bilateral trade relations but didn’t mention NAFTA outright. The statement, meanwhile, pledged a commitment to advancing the controversial Keystone XL pipeline and other energy infrastructure projects.
But a planned summit between Trump and Mexican President Enrique Peña Nieto never took place.
Peña Nieto canceled the summit over a border wall payment dust-up months in the making.
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