Latin America Advisor

Energy Advisor

A Publication of The Dialogue

How Does the New USMCA Deal Affect the Energy Sector?

Canadian Foreign Minister Chrystia Freeland, U.S. Trade Representative Robert Lighthizer and Mexican Economy Minister Ildefonso Guajardo (L-R) spent more than a year negotiating the modernization of the trilateral trade deal. // File Photo: Mexican Government. Canadian Foreign Minister Chrystia Freeland, U.S. Trade Representative Robert Lighthizer and Mexican Economy Minister Ildefonso Guajardo (L-R) spent more than a year negotiating the modernization of the trilateral trade deal. // File Photo: Mexican Government.

The United States, Mexico and Canada on Sunday reached a last-minute deal to revamp the North American Free Trade Agreement after more than a year of talks, rebranding it the “United States-Mexico-Canada Agreement,” or USMCA. What are the biggest changes in the new deal as it pertains to energy? Which countries and which oil and gas stakeholders stand to gain or lose the most? Will USMCA help boost intra-regional investment and energy cooperation in North America?

Larry B. Pascal, partner in Dallas, and Nicolás Borda, partner in Mexico City, both with international law firm Haynes and Boone: “In discussing the impact on the treatment of energy under the United States-Mexico-Canada Agreement (USMCA), it is important to acknowledge that the final text has not been signed or released. Nevertheless, certain overview observations can be made. For example, the U.S. Trade Advisory Committee on Energy and Energy Services, dated Sept. 27, provided comments to USTR Robert Lighthizer on the energy aspects of the USMCA. The Advisory Committee comments include: approval for the investor-state dispute resolution (ISDS) protection being added for oil and gas, infrastructure, energy generation and telecommunications; concern for the relatively short period of the sunset clause (16-year term); and support for deepening cross-border ties in the energy sector. Under the USMCA, there is also a new chapter on anti-corruption and a separate stand-alone chapter on the environment. Interestingly, from a Canadian perspective, NAFTA had required Canada not to limit exports of oil and gas to the United States. That requirement appears to have been removed from the USMCA. We see a variety of stakeholders in the energy sector benefiting under the USMCA. U.S. and Canadian energy investors will have more certainty as to their energy investments in Mexico. Mexico will also benefit by increased investment in the sector. Finally, consumers from the three countries will benefit from enhanced supply and efficiency in the more integrated North American energy market. Finally, we envision that the region will benefit as a whole by enabling greater inter-regional investment and legal certainty in the regional energy marketplace.”

Pedro Niembro, senior director at Monarch Global Strategies: “All parties—the United States, Mexico and Canada—can claim a win from the USMCA agreement when it comes to energy. For the United States, the oil and gas industry can celebrate what did not change, whereas Mexico and Canada were able to introduce provisions important to their interests. Despite initial threats to remove it, the investor-state dispute settlement mechanism between the United States and Mexico was preserved for a handful of industries, including oil and gas and power generation. As a result, energy investors are provided with much-needed certainty over their ventures in Mexico. The agreement also maintains NAFTA’s allowance for tariff-free trade of raw and refined oil and gas products between the United States and Mexico and grants equal opportunities to participate in Pemex and CFE tenders, which is important given President-elect López Obrador’s ambitious plans for energy investment. For Mexico, the USMCA includes a statement important to AMLO that declares Mexico has ‘direct and inalienable ownership’ of its hydrocarbons and the capacity to introduce constitutional changes to the energy sector. Meanwhile, Canada was able to wipe out the largely symbolic ‘proportionality clause’ and to eliminate tariffs on diluent used to transport heavy oil. The USMCA should support continued integration of energy interests within North America, which has been increasing since Mexico opened its energy markets four years ago. The bigger determinant of future investment rests with the incoming Mexican administration. Despite fears it will slow down or even cancel energy reforms, we believe foreign expertise and investment will be needed to achieve AMLO’s energy goals; the USMCA’s energy provisions should provide investors with the confidence to make this happen.”

Murray Smith, former minister of energy of Alberta:“Canada’s energy sector can now exhale. The sector and the regulations surrounding the free flow of natural gas, oil and for the most part electricity have been left largely untouched. The leaders of the energy sector have continued certainty and familiarity with the shipment of product, investment regulations, industry/government dispute settlement regulations and general code of conduct. This will have a minimal present-day effect on Canada and will loom more important for the emerging new investment/exploration structures for investment in Mexico. Canada has enough domestic issues hampering investment and growth in the energy sector. Canada desperately needs broader—and immediate—market access to markets other than the United States. A long-awaited final investment decision on an LNG project will stimulate natural gas sales in northwestern Alberta and northeastern British Columbia. Had the energy sector been under direct siege in USMCA negotiations, this would have opened a war on two fronts and would have inflicted even more damage on an already embattled sector. It is often said the only thing preventing perpetual prosperity in Canada is Canadians. This axiom seems ever more relevant in today’s world of constricting regulation and delay inducing jawboning by politicians. Thankfully, not upsetting the North American marketplace for hydrocarbons will allow energy leaders in Canada to continue to focus on ‘made in Canada’ issues facing the orderly development of an almost infinite resource. Canada, at the same time, should realize that this open market approach to energy marketing and delivery turns the United States into a strong competitor as well as a valued customer. The U.S.-produced natural gas from the Marcellus and Utica basins is geographically much closer—and hence cheaper. Canada continues to lose out in replacing close to a million barrels per day of imported oil with its own domestic supply. Time to wake up Canada; as the Pogo cartoon once noted: ‘we have seen the enemy, and the enemy is us!’”

Luis Miguel Labardini, partner at Marcos y Asociados Infraestructura y Energía in Mexico City:“The new agreement does not specifically address the challenges the oil and gas industry faces at the North American level. However, it will set up the framework for greater cooperation in a sector that is destined to become increasingly integrated. Mexico is already importing from the United States more than 70 percent of its fuel and natural gas needs, a dependency that has created some concern south of the border. President-elect López Obrador would like to reduce the level of gasoline imports, but such a reduction will require the continuation of the market liberalization that the energy reform triggered, and it will require the participation of private investment on both sides of the border. Exploration and production in Mexico will benefit from an already committed investment of $200 billion, but the execution of the drilling and development programs pose a challenge that can only be alleviated by a more open border for investment, personnel, materials and equipment. A natural gas well in Mexico is today three times as costly as one drilled in the United States. A more dynamic border would allow for the very successful U.S. oil and gas cluster to transfer its learning curve to the Mexican basins. There is a natural tendency for greater integration of our three energy markets, and this will result in the largest and most efficient energy system in the world.”

Clifford Sosnow, co-head of Fasken’s international trade & investment group in Canada:“There is a risk that changes in the USMCA may sow additional uncertainty into large-scale capital projects. Most notably, the former NAFTA Chapter 11 that enabled investor-state dispute resolution before an impartial tribunal is essentially written out of the new agreement. This dispute resolution process acted as a check on arbitrary regulation by governments and protected investors in large-scale capital projects (including oil and gas exploration, extraction and transportation) by ensuring fair and equitable treatment, regardless of nationality. Otherwise, these investors could bring action against the NAFTA signatory before an independent tribunal. Any oil and gas stakeholder that relied on the dispute resolution chapter of NAFTA to calm investor nerves will be disadvantaged by this new legal regime, with recourse only under the agreement’s government-to-government dispute rules or in the investment country’s domestic court system. The lone exception to this is that the USMCA preserves the investor-state dispute resolution process between Mexico and the United States for certain industries including oil and gas. Also, the agreement includes nothing in the procurement chapter that prevents the use of the United States’ ‘buy America’ rules for major infrastructure projects, including pipelines. Lastly, although not binding, the environment chapter of the USMCA, like the NAFTA, states that it is ‘inappropriate to encourage trade or investment by weakening’ environmental protection. While the USMCA does not radically alter the business landscape for the energy industry, oil and gas stakeholders ought to be aware how these changes may have an effect on the way they do business.”

The Latin America Energy Advisor features Q&A with leaders in politics, economics, and finance every week. The publication is available to members of the Dialogue’s Corporate Program and others by subscription.