Any NAFTA revamp probably won’t mess with the energy sector

Renegotiating the North American Free Trade Agreement would be a journey with implications for hundreds of industries throughout the continent.

And although some elements of the deal — such as rules influencing manufacturing — figure to be ripe for changes, many analysts, academics, government officials and corporate executives in the U.S., Canada and Mexico seem to agree on one aspect of NAFTA: Don’t mess with the energy sector.

“This is a North American energy system,” said Jim Ellis, chief executive of Canada’s Alberta Energy Regulator. “We rely on one another across the border.”

Ellis was one of the speakers at a La Jolla conference last week sponsored by the Institute of the Americas, a nonprofit policy center at UC San Diego, that brings together a wide range of people from across the Western Hemisphere each year to discuss the state of the energy industry.

This month, the Trump administration took the first formal step to make changes to NAFTA: U.S. Trade Representative Robert Lighthizer notified Congress of the administration’s intentions.

The move triggered a 90-day review process that could result in U.S. trade officials initiating talks with counterparts in Mexico and Canada as soon as Aug. 16.

Although Trump often called NAFTA “a disaster” while campaigning for president, Lighthizer took a more conciliatory tone when the renegotiation was formally announced, indicating a desire to alter — but not completely overhaul — the agreement.

“We should build on what has worked in NAFTA and change and improve what has not,” Lighthizer said, adding that agriculture, investment services and energy aspects of the 23-year-old deal have proven to be successful.

Statements like that may soothe some nerves on both sides of the border.

Canada is the U.S.’ largest energy trading partner, with transactions in 2013 estimated at $140 billion. More than 80 pipelines and 30 electricity transmission lines connect the two countries.

“A lot of companies have been very worried that if you actually begin to renegotiate NAFTA, then you could put in jeopardy those arrangements that were signed some 20-odd years ago,” said Duncan Wood, director of the Mexico Institute at the Washington, D.C.-based Wilson Center.

Mexico essentially opted out of formal energy provisions when NAFTA went into effect in 1994, but the policy landscape has changed dramatically since then. Four years ago, Mexico adopted reforms that are deregulating its state-owned energy monopolies.

With a goal of expanding the country’s power grid and energy development, the Mexican government has welcomed bids from foreign companies, many of them based in the U.S.

In recent months, San Diego-based Sempra Energy, through its IEnova subsidiary, completed the acquisition of a wind generation project in Mexico for about $900 million and closed on a $1.1-billion purchase of a 50% stake in an infrastructure company that includes natural gas pipelines.

Mexico has also developed into an eager importer of gasoline and natural gas from the U.S. It has been estimated that Mexico’s imports of U.S. gas could double in the next five years.

Earlier this month, the chief executive of Anadarko Petroluem Corp. said NAFTA provides stability for the U.S. natural gas industry.

“I don’t think that it’s likely we’ll disturb NAFTA in a way that will [detrimentally] affect natural gas prices, but it’s just a good example of how the U.S., working with Canada and Mexico, needs to be one energy market, and I’m hopeful that our administration recognizes that,” Anadarko’s Al Walker said.

Given the stakes, a renegotiation of NAFTA is unlikely to disturb energy markets, said David Crisostomo, a Mexico City-based associate director for the energy analysis firm IHS Markit.

“Gas exports for the U.S. to Mexico are a key market outlet,” Crisostomo said. “So I don’t think you want to touch that.”

Wood said many Mexican government officials look forward to putting energy on the negotiating table because, with a Mexican presidential election coming in 2018, it would give the officials a chance to ensure Mexico’s energy reform policies stay in place regardless of political fortunes.

“One way to do that is to get [the reforms] into the North American Free Trade Agreement, which for Mexico actually has the status of an international treaty, which guarantees it almost equivalent status as the constitution,” Wood said. “So this is another way of locking in the gains in Mexico in the near future.”

Meanwhile, looking north, U.S refiners are big consumers of Canadian oil.

There may not be an appetite for including energy in a NAFTA renegotiation, but a combustible political climate affords little room for certainty.

Weeks ago, Trump said he was close to issuing an order to withdraw from the trade agreement, but he reconsidered.

In January, shortly after Trump took office, Mexican President Enrique Peña Nieto canceled a trip to Washington in the aftermath of Trump’s comments about Mexico paying for a border wall.

Earlier this year, the Trump administration placed tariffs on Canadian lumber exported to the U.S., complaining it is subsidized unfairly, and both countries have argued over Canada’s import policies on dairy products.

The U.S. has a $62.7-billion trade deficit with Mexico and an $8-billion trade surplus with Canada.

“There was a scare” in Mexico when Trump was elected, said Jaime Martinez, business development director for private consulting firm ERM Mexico, who was one of the La Jolla conference attendees. “The peso [lost] ground against the dollar, but now it’s just the opposite. People think there are going to be some changes to NAFTA ... but now [there] is a less scary scenario.”

John Padilla, managing director of IPD, an energy consulting firm based in Miami, said NAFTA provides the framework for economic progress for all three countries.

“It really creates a fantastic opportunity for all of North America to create an incredible economic powerhouse,” Padilla said. “Economically healthy neighbors are good neighbors.”

Pointing to the political calendar, Wood said completing a successful renegotiation of NAFTA will be challenging, given the timing of the 90-day consultation period.

“You have to basically wrap up negotiations by Christmas because if you don’t, you’re into an election year in Mexico and, incidentally, in the United States as well,” he said. “I don’t see how you address any of the substantive issues that the American administration wants to talk about in that five-month period.”

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