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INTERVIEW-'Three Amigos' to discuss oil pipeline at Mexico trade summit

WASHINGTON/MEXICO CITY, Feb 17 (Reuters) - North America's three leaders will discuss a controversial pipeline project that would transport Canadian crude deep into the United States at a trade summit this week, Mexico's top diplomat said on Monday, adding he does not see it as a competitive threat.

The proposed Keystone XL oil pipeline will help shape the distribution of crude supplies in the region, and Mexico is already beginning to diversify its oil exports away from the United States given surging production there.

Mexican Foreign Minister Jose Antonio Meade said he was sure the pipeline issue would come up at the North American leaders' summit set to kick off on Wednesday in the Mexican city of Toluca.

North American Free Trade Agreement (NAFTA) partners U.S. President Barack Obama, Canadian Prime Minister Stephen Harper and Mexican President Enrique Pena Nieto, dubbed the "Three Amigos," are expected to focus on commerce and other economic issues at the summit.

If approved by Obama, TransCanada Corp would build the pipeline with a capacity to move 830,000 barrels per day (bpd). It would delivery Canada's heavy oil sands crude to U.S. Gulf Coast refiners, which is also the top destination for Mexico's mostly heavy crude exports. The pipeline could also transport oil from Montana and North Dakota, which are along the pipeline's 1,179-mile (1,897-km) route.

"We do not see it (as a threat)," Meade told Reuters in a phone interview. "That is probably not as relevant in terms of the big numbers as the shale revolution has been in the U.S."

While Mexico, the world's 10th biggest crude producer, still exports the overwhelming majority of its crude exports to the United States, oil shipments to the world's biggest economy are down by half from a 2006 peak of 1.8 million bpd.

Mexico is increasingly shipping crude to Asian markets, in particular China and India.

Obama will have the final say on whether to allow the more than $5 billion pipeline, a decision not expected for many months.

A senior U.S. administration official told reporters last week that he did not expect Obama to provide any new details regarding the timing of his decision to Harper or Pena Nieto at the summit.

Obama has said in the past that he believed the pipeline should go ahead "only if this project does not significantly exacerbate the problem of carbon pollution."

The U.S. State Department concluded late last month that the pipeline will not unduly worsen climate change. But eight different U.S. federal agencies will have a chance to weigh in on the pipeline over the next three months.

Meade said he does not expect any major energy deals to be announced during the summit.

"It is not likely that we will cover or explore specific joint ventures at this stage, but we know that those debates and that interest is ongoing," he said.

In December, Pena Nieto pushed a sweeping energy reform through Congress that promises to boost oil and gas production by luring significant new streams of private investment into the long-shuttered sector.

NAFTA REVISITED?

U.S. Commerce Secretary Penny Pritzker said earlier this month that the 20-year anniversary of NAFTA was an appropriate moment to look at how to "upgrade" North American trade ties.

However, retooling the trade pact between Canada, Mexico and the United States is not necessary because trans-Pacific talks will cover any gaps left by NAFTA, Meade said.

"Using NAFTA as a platform, but without a need to revisit it, we think that there are many things that could be done between our three countries in order for us to take advantage of that platform and to push forward a more North American perspective," he said.

The United States, Mexico and Canada are part of negotiations among 12 Pacific Rim countries to lower barriers to the flow of goods and services across national borders called the Trans-Pacific Partnership or TPP.

"Most of those issues that were not present in NAFTA are present in TPP, which has the ambition of being a high-quality trade negotiation," Meade said, without specifying which areas Mexico would like to see addressed.

Analysts say the TPP talks will allow the three countries to adapt their trade relationship to the ways in which advances in technology have changed global commerce over the last two decades.

"NAFTA was negotiated 20 years ago when the global economy was very different from what it is today," said Arturo Sarukhan, a former Mexican ambassador to the United States.

"It was the gold standard at the time. But since then the global economy has changed, the way we negotiate free trade agreements has changed and so in many ways the challenge is how do we pull up and modernize NAFTA," he said.

Obama has singled out expanding U.S. trade as an important avenue for strengthening economic growth this year. But leading congressional allies have thrown cold water on those hopes.

His fellow Democrats have traditionally raised concerns that trade agreements cause an exodus of U.S. manufacturing jobs and ease burdens on U.S. firms to meet high environmental standards. With congressional elections looming in November, some Democrats want to avoid alienating key supporters by backing trade agreements.

(Additional reporting by Ana Isabel Martinez in Mexico City; Editing by Simon Gardner and Lisa Shumaker)