CERAWeek by IHS Markit

Energy is crown jewel of NAFTA nations and will bind them, even in a trade war

Key Points
  • The U.S. buys and sells energy from both its northern and southern neighbor, and it is one industry that binds North America together, regardless of whether there is a NAFTA agreement.
  • President Trump's planned tariffs on steel and aluminum raise new concerns about the future of the NAFTA, currently being renegotiated.
  • President Trump tweeted Monday he may drop tariffs for Canada and Mexico if they can renegotiate a new NAFTA deal with the U.S.
  • The top energy officials of the U.S., Canada and Mexico will be together on a panel at the annual IHS Markit CERAWeek conference Wednesday.
The Valero refinery in Port Arthur, Texas
Michael S. Williamson | The Washington Post | Getty Images

President Donald Trump's tariffs on steel and aluminum raise new concerns about the U.S. commitment to NAFTA, but energy is one industry that could continue to bind North American commerce together, regardless of trade deals. On Monday, Republican House Speaker Paul Ryan urged Trump to rethink his plan to place a 25 percent tariff on steel and a 10 percent tariff on aluminum, noting he is "extremely worried" about the fallout. The president tweeted he may drop tariffs for Canada and Mexico if they can renegotiate a new NAFTA deal with the United States.

The energy interests of the United States, Mexico and Canada are so integrated, it would be in no one country's interests to undo them, industry experts say. The United States is both a buyer and seller of energy with both its southern and northern neighbors and has been for decades.

"On all sides, the idea of a North American energy security, energy dominance is a consistent goal across all countries," said Jackie Forrest, ARC Energy Research Institute senior director of research. "I would expect ongoing free trade for energy. It's a win-win for all parties. The scenario of having tariffs on energy — nobody really wins from that."

The top energy officials from all three countries will appear together Wednesday at the annual IHS Markit CERAWeek energy conference in Houston. U.S. Energy Secretary Rick Perry; Canadian Natural Resources Minister James Gordon Carr; and Pedro Joaquín Coldwell, Secretary of Energy, Mexico, are expected to discuss common interests and challenges.

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"I think they'll set a fairly positive tone," said Carlos Pascual, IHS Markit senior vice president, who will moderate the panel.

Pascual said energy is one area that reinforces cooperation between the three countries and "reinforces why a continuing trade agreement between the three countries is a good thing. I think you'll hear from all three countries the potential for development in each country, the potential for investment in Mexico as a new entrant in global markets. I think all three will face a common perspective on the challenges of infrastructure."

He added, "All three of them will talk about the importance of regulatory certainty and the need to work together and share from each other's experiences."

Pascual said he expects the Canadian and Mexican officials to have questions about the impact of U.S. deregulation of the energy sector. "The U.S. has essentially put a lid on regulation and made it clear that whatever regulation exists will be downward. How does that affect the competitiveness of the assets they offer?"

Pascual said he does not believe the absence of a NAFTA agreement would result in new tariffs on the energy sector, should the three countries fail to agree to a revised deal.

The United States imports both Canadian and Mexican oil and sells natural gas and fuel to Mexico. Canada is the biggest U.S. supplier of foreign oil, and it buys some U.S. crude and sells it gasoline, natural gas and electricity.

A dramatically changed energy landscape

The outlook for North America changed dramatically in the last decade. The push by the U.S. energy industry into hydraulic fracking and horizontal drilling unleashed an energy boom, making the United States the world's biggest producer of natural gas and just recently the second-largest producer of oil, surpassing Saudi Arabia.

That has changed the situation for all of North America at a time when Mexico's oil and gas output was in decline and Canada found some of its potential oil output landlocked. The ties between the three countries go way back. In the early 1900s the United States began sharing electricity with its neighbors, and Canada is now a significant net exporter of electricity to the United States.

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A new catalyst bringing the three together has been Mexico's program of energy reform, intended to break the hold of state-owned Pemex on its industry and bring new private investment to Mexico's energy industry. The decline in big part was due to a lack of investment by the government in Petroleos Mexicanos, and its increasing reliance on the Pemex revenue stream for its own budget.

Pascual said Mexico has made rapid advancement in bringing in foreign capital and partners to open up its industry. "They have every single super major engaged in a deep and serious way, principally in deep water and shallow water projects," he said, adding there have already been two significant finds in shallow water, including one by ENI and another by a consortium of companies including Talos Energy and Premier Oil.

But Citigroup North American economist Dana Peterson said energy could become a political football. For instance, Mexico could rely on its own oil resources to displace some of the U.S. natural gas it is now buying, but she does see a 60 percent chance a new NAFTA deal will be approved.

Juan Carlos Hartasánchez, Albright Stonebridge Group senior director, said energy isn't a big enough common interest to bring the NAFTA negotiations together but it could help. Mexico's transition makes the North American energy picture even brighter, he said.

"Now Mexico has opened its energy sector to private investment, there's a lot of opportunity for both Canadian and U.S. companies that want to invest and trade in energy," he said. "The modernization of the energy chapter would be one of those chapters that Mexico, the U.S. and Canada would win from. Part of the idea was to have NAFTA be energy self-sufficient and an energy powerhouse simply because the resources exist."

Pascual said the original NAFTA is preferred by the energy industry because it has a provision for arbitration of disputes. Under the new U.S. proposals, companies could end up in courts instead.

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