WHY ENERGY INDUSTRY COULD COME OUT WINNER
Canada, Mexico and U.S. see chance for further integration, writes Jesse Snyder.
OTTAWA Government officials and energy industry representatives are eyeing key changes that could deepen ties between the three countries’ oil, gas and electricity industries as the North American Free Trade Agreement renegotiation kicks off next week.
Energy ministers in Canada, Mexico and the United States have so far struck a conciliatory tone ahead of Wednesday’s scheduled start to the talks, a stark contrast to President Donald Trump’s campaign rhetoric in which he threatened to dismantle the deal in favour of more U.S.-friendly policies.
Energy trade and investment ties between the three markets have been highly integrated since NAFTA came into effect in 1994, but all three see several opportunities for further integration, nudging the continent closer to forging a North American energy bloc — a grandiose plan that has been tried, and repeatedly failed, for decades.
The premise: In an increasingly uncertain energy market, harmonized economic and environmental ties between Canada, the U.S. and Mexico could position North America as the dominant energy superpower.
Although Trump’s pointedly “America first” foreign policy stance has dampened hopes of finding common ground, the countries’ respective energy ministers in recent months have suggested they are at least open to a broader agreement.
Public officials point to several current policies that could be improved, such as tweaking the “rules of origin” agreements on petroleum imports, expanding crossborder electricity corridors and solidifying the recent liberalization of Mexico’s oil and gas sector.
U.S. Energy Secretary Rick Perry in June told reporters he was interested in pursuing a North American energy strategy, saying that Canada-U.S. relations were more important than ever, “particularly from an energy perspective.”
Perry and Canadian Natural Resources Minister Jim Carr have met in person on three occasions, according to Carr’s office. He has also spent recent months meeting U.S. energy executives, union leaders and industry representatives ahead of the talks.
“(Energy) is one area where the three governments actually have converging interests,” said Todd Weiler, a London, Ont.-based arbitration lawyer who specializes in NAFTA disputes.
A joint statement released this month by the Canadian Association of Petroleum Producers (CAPP) and its U.S. and Mexican counterparts highlighted several energy regulations and trade laws that could be updated or streamlined.
In particular, they called for better cross-border mobility of people and infrastructure, including everything from drilling rigs to emergency response equipment.
The groups also advocated for looser restrictions on rules of origin for oil imports.
Currently, for example, some Canadian oil exports to the U.S. and Mexico, if mixed with a thinning agent called diluent that allows bitumen to flow through a pipeline, have been slapped with duties because buyers cannot verify that the product originated in a NAFTA country.
As a result, Canadian oilsands producers have in recent years been forced to import higher volumes of diluent from the U.S. to mobilize their heavy crude as bitumen production in northern Alberta continues to climb.
The groups also advocated for provisions allowing for the unrestricted flow of data between countries.
The Canadian and U.S. energy sectors in particular are highly dependent on one another. A recent report by the Canadian Energy Research Institute estimates the total capital investment and revenues from operations over the next 11 years will generate $2.7 trillion in GDP in Canada and US$45.6 billion in the U.S.
But integrating an energy market is not easy, even within one country.
Canadian provincial and federal politicians have long tried to establish common energy goals in order to streamline the construction of oil pipelines or install federal regulations aimed at cutting carbon emissions.
Their efforts are in direct response to the political and environmental opposition on major pipeline proposals, which have been delayed for years.
Such efforts have involved warm-sounding agreements, but have been criticized for not being backed by hard policy.
Seeing that Canada has failed to integrate its energy markets, a continental strategy seems even more unlikely — particularly since Trump and Prime Minister Justin Trudeau sharply diverge on environmental policy.
And yet, some are calling on Canada to use NAFTA negotiations to interlock the three countries’ physical energy systems and establish itself as a leader on climate policy.
“I think we can use the NAFTA negotiation table to put a stake in the ground on aligning environmental policy,” said Sen. Doug Black, who founded the Energy Policy Institute of Canada, which focuses on energy market integration.
“It’s in Canada’s clear interest to do that, because we are now offside on where president Trump wants to go, and the result of that adds to the competitive burden that Canadian business is incurring month after month after month.”
Mexico is seen as a critical wild card in energy negotiations. Analysts say the three countries are particularly eager to formalize the liberalization of Mexico’s energy industry, which in mid-2014 opened up large blocks of onshore and offshore oil and gas leases to foreign investors.
The changes, introduced by President Enrique Peña Nieto, created billions of dollars in foreign direct investment.
U.S. and European energy companies, including Royal Dutch Shell PLC, Statoil ASA and Chevron Corp., were among the top bidders.
Several U.S. pipeline companies, along with Calgary’s Trans-Canada Corp., have been building natural gas pipelines in Mexico as it expands output. And General Electric Co., among others, is selling natural gas generators to Mexican buyers as the country modernizes its electricity grid.
Negotiators are keen to bring some level of permanence to Mexico’s new-found openness to foreign investment, but some believe it could be threatened by left-leaning opposition leader Andrés Manuel López Obrador, who objects to economic liberalization. He leads several public polls ahead of the country’s presidential election next year.
“One could rewrite NAFTA to put a firmer foundation in place to keep those markets open,” said Alan Krupnick, a senior fellow at the RFF Center for Energy and Climate Economics in Washington.
Krupnick and others also see opportunities for improved trade ties in electricity generation, particularly along the Mexico-U.S. border but also between the U.S. and Canada.