HOW NAFTA’S END COULD DISRUPT ENERGY TRADE
Collapse could mean losing benefits of fewer barriers, writes Claudia Cattaneo.
Energy trade between Canada, the United States and Mexico has been such a success under the North American Free Trade Agreement (NAFTA) it has barely come up as an area in need of improvement.
But even such a good thing could come to an end if the trade deal collapses — a possibility the Canadian government is bracing for as difficult negotiations start a sixth round in Montreal next week.
The U.S. would be worse off because it would lose the preferential access to Canadian oil it has enjoyed — an obligation that has been controversial in Canada.
The Americans fought hard for the “proportionality clause” in the aftermath of the National Energy Program, which prioritized Canadian energy security, because they didn’t want to face similar “handcuffs” in the future, said Derek Burney, Canada’s ambassador to the U.S. from 1989 to 1993 and a key player in both NAFTA and the U.S.-Canada Free Trade Agreement.
“They would be shooting themselves in the foot,” said Burney, who is now a strategic adviser at law firm Norton Rose Fulbright, but doesn’t believe the deal is in jeopardy despite all the gloom.
“They would no longer have any automatic right to a proportional share of the resource in Canada,” he said. “It won’t be as substantive an issue for them now that they have so much more of their own resource, but it’s a loss for them, it’s not a loss for us.”
Article 605 says Canadian energy exports to the U.S. as a percentage of total output cannot fall. In particular, it prohibits the Canadian government from imposing restrictions that causes U.S. imports of Canadian energy to fall, as it did under the NEP.
Such preferential access wouldn’t be as advantageous today as it was in the 1980s because U.S. production of both oil and gas is booming thanks to discoveries of shale gas and tight oil, and is expected to soon climb to a new record above 10 million barrels a day.
Yet the U.S. is still a major oil importer, it’s unknown if the production boom will continue longer term, and the U.S. relies on Canada for its energy security — a key reason why one of U.S. President Donald Trump’s first moves was to approve the Keystone XL pipeline.
Thanks to NAFTA, which promoted investment and market integration, the three countries are on track to achieve energy self-sufficiency as early as 2020, as production of liquid fuels is expected to exceed consumption, according to associations representing industry in the three countries, including the Canadian Association of Petroleum Producers.
But NAFTA’s collapse could mean a return to tariffs and trade barriers that preceded the deal and disrupt energy trade, the industry groups said in a recent statement. The deal eliminated tariffs for crude oil, gasoline, motor fuel blending stock, distillate fuel oil and kerosene type jet fuel. (The U.S. still has tariffs on oil and natural gas products that cannot be proven to have Canadian origin).
In addition, “We will of course lose the benefit of certainty that comes with an international agreement that allows investors to know that these marketbased policies will persist for the foreseeable future, and allow them to make these long-term investments with much greater confidence,” said CAPP general counsel Nick Schultz.
Schultz doesn’t anticipate immediate disruption as there are other market-oriented agreements in place if the U.S. withdraws from NAFTA.
Still, he said the deal has been great for North America’s energy sector and for its consumers and its loss would be felt. The U.S relies on imports from Canada to meet all its energy requirements and Canada is a vital source of supply to the U.S., he said.
“We have been a very well functioning North American market place, the free market has unlocked innovation and given us this great abundance of resources,” Schultz said. “When you think back about the 1980s, everyone was still worried about scarcity. (Now) we have an abundance of resources, we have attracted an enormous amount of investment in all three countries now, and there isn’t a sector in Canada that doesn’t benefit from the activity that is taking place here in the upstream.”
In its annual state of the industry address last week, Jack Gerard, president of the American Petroleum Institute, urged the U.S. administration to maintain the benefits of North American energy integration.
“North America provides a great example of integrated and interdependent energy markets that benefit all three trading partners,” Gerard said. “NAFTA has been critical to that success. NAFTA makes energy more affordable and improves opportunities for U.S. companies in Canada and Mexico.”
To be sure, the end of the “proportionality clause” if NAFTA fails frees up Canada to export as much energy as it can handle to places like China.
For now, though, it can handle about zero. Canada remains dependent on the U.S. market for its oil and gas exports, which has meant heavy discounts, and will continue to be until it builds export infrastructure like oil pipelines to the coasts and liquefied natural gas terminals.