NAFTA Talks Called Opportunity to ‘Lock In’ Mexican Energy Reforms, U.S. Gas Trade

From Naturalgasintel.com / Peter de Montmollin / September 11, 2017

«The North American Free Trade Agreement (NAFTA) renegotiations are an opportunity to update the 1994 treaty so that it reflects changes in Mexico’s oil and natural gas sector and deepened ties to Canada and U.S. energy markets, according to analysts.»

«“North American energy markets have changed, and there are the new reforms in Mexico,” BDO Mexico’s Rita Mireya Valdivia Hernandez, a partner in the tax practice, told NGI.  “We need to adapt or modify NAFTA so that it is aligned with what North America is today.”»

«Talks to hammer out the details of a new NAFTA began in mid-August with the first of seven negotiating rounds scheduled through December. Delegates from the United States, Mexico and Canada met again in early September, while the third round is scheduled for Sept. 23-27.»

«The Mexican energy industry was, and remains, exempt from certain clauses on oil and gas trade in Chapter 6 in the original NAFTA of the 1990s because constitutional constraints at that time restricted foreign investment.»

«After the 2013 energy reforms, “the constitution now allows for foreign companies to come in and exploit Mexico’s resources,” Valdivia Hernandez said. “That is not written into NAFTA.” A modernized NAFTA could remove those exemptions and also incorporate new environmental regulations enacted since the treaty came into force on January 1, 1994, she said.»

«Moreover, Mexico’s energy integration with its northern neighbors — most of all, the United States — has deepened considerably since NAFTA’s implementation. Mexico is becoming more dependent on imported U.S. natural gas. It also exports heavy oil for processing in U.S. refineries on the Gulf Coast, which then sell the final products back to Mexico.»

«At the latest round of talks, which concluded in Mexico City earlier this month, the head of the Mexican delegation said negotiators were focusing on ways to incorporate the energy reforms into NAFTA, according to Reuters.»

«Writing the energy reforms into the treaty also would help the outgoing Mexican administration to protect it from any potential political blowback, according to speakers on a panel organized last week by the Atlantic Council in Washington, D.C. One of the leading candidates for the 2018 Mexican presidential elections, Andres Manuel Lopez Obrador, is a vocal critic of the reforms.»

«“There obviously is a risk of reversal, but in NAFTA itself one of the ways you modernize is to try and lock in those reforms in terms of international obligations,” said senior fellow Jeffrey J. Schott of the Peterson Institute for International Economics. “That is something that should be readily done, to the benefit of both the United States and Mexico.”»

«The energy sector is not at the center of the NAFTA’s most contentious talks, which include dispute arbitration mechanisms and rules of origin. Nevertheless, the industry has emerged as one of the treaty’s strongest defenders.»

«Leading North American oil and gas trade associations jointly issued a position paper last month that touted the successes of NAFTA and urged negotiators to “do no harm.” In July, a senior executive for Sempra Energy, which operates in Mexico as IEnova, testified before the U.S. Congress that the agreement had been a “big win” for the domestic energy sector.»

«The natural gas sector in particular has cemented the energy trade bonds between the United States and Mexico, at a time when their long-standing diplomatic relationship is being tested by the combative rhetoric of President Trump. Former Texas governor and now Secretary of Energy Rick Perry, as well as Secretary of State Rex Tillerson, a Texas native who formerly was CEO of Irving, TX-based ExxonMobil Corp., still have strong ties to the state.»

«With its domestic gas supply on the decline, Mexican power plants and large industrial consumers are eager buyers of surplus gas from Texas producers. Under NAFTA, exporters in the United States do not pay tariffs on shipments to Mexico, which phased out its duty on natural gas imports in August 1999.»

«“Frankly, the survival of the U.S. gas industry depends on exports to Mexico,” said David L. Goldwyn, president of Goldwyn Global Strategies LLC, at the recent Atlantic Council meeting.»

«As a signatory to NAFTA, Mexico is granted free trade agreement (FTA) status under U.S. regulations, which has also facilitated expanding cross-border pipeline infrastructure. The U.S. Energy Department has automatically approved exports to FTA countries.»

«To date, companies along the U.S. border have built 17 pipelines, with a total installed capacity of 7.5 Bcf/d, to meet demand in Mexico. At least two more pipelines are under development.»

«“The uncertainty for Mexico is, will they continue to have that status?” Goldwyn asked. “And if you’re a gas buyer, how certain is that supply?”»

«More broadly, the biggest uncertainty for the energy sector is the fate of the investor-state dispute settlement mechanism in Chapter 11 of NAFTA, according to panel members at the Atlantic Council meeting. It is not clear whether Chapter 11 eventually would be targeted in the current negotiations, but both the U.S. and Canadian governments have indicated that they may seek to reform it.»

«In Mexico, the arbitration mechanisms under NAFTA have provided security for U.S. companies investing in pipelines and other energy infrastructure, and any signs of a breakdown in the system could cause investors to slow or even halt those projects, Schott said.»

«Goldwyn noted that Mexico’s deepwater oil and gas projects were particularly sensitive.  “You’re talking about contracts where it is $100-200 million per well, and you’re waiting eight years to make money.»

«“You’re not going to make that investment, versus Brazil, versus sub-Saharan Africa, unless you are sure that if something goes wrong and things don’t work out with the government, that you have some third-party neutral source arbitrating that dispute, so that you don’t throw away $500 million and end up with nothing,” he said.»

«U.S. and Mexico authorities each have indicated they would like to finish NAFTA talks by early 2018. The Atlantic Council panel speakers, however, were skeptical the deadline would be attainable, citing the scope and ambitions of the negotiations.»

«Furthermore, “there are political constraints in pursuing compromises and negotiation strategies in an election year, both in the United States and in Mexico,” Schott said. “I think there’s a good chance that the negotiations will still be ongoing in 2019.”»

From Naturalgasintel.com / Peter de Montmollin / September 11, 2017