Modernizing NAFTA Holds Promise for an Energy Powerhouse in the Americas

In the twenty-five years since NAFTA was negotiated, the energy world has changed dramatically.

Before NAFTA, America’s oil and gas shale boom was a pipe dream, the oil fields of Brazil had not been discovered and Mexico barred private investment in energy development. Now, the energy relationship between the United States and Latin America is far more important and, as a result, is an influence in U.S. foreign policy. Now, the largest share of the United States’ energy sector international trade and investment is in the Western Hemisphere and the market is now deeply integrated. Even with the shale oil and gas boom and drop in imports, the United States still relies on Latin America for more than 30 percent of the oil it buys from abroad. Further, oil exports to the United States from Colombia, Ecuador, Mexico, and Venezuela to the U.S. are the most important source of revenue for those countries. In addition, Latin America is a growing importer of U.S. natural gas and the largest market for U.S.-made refined petroleum products, such as gasoline.

More important, there is great potential. Tremendous new energy resources are awaiting development in Latin America. U.S. oil and gas companies, as well as renewable energy producers, are big investors in Argentina, Brazil, Mexico, and Venezuela, helping to develop the energy resources of all those countries. In Brazil, the United States’ direct investment in oil and gas extraction reached $2.4 billion in 2015; in Mexico, the figure was $420 million. U.S. institutions and funds back clean energy investments and provide regulatory and technical guidance to tap the region’s shale fields.

Reopening of the transformed Panama Canal also has transformed energy markets in our hemisphere as it has re-charted global trade routes. The nine year, $5 billion renovation provided a third set of locks and deeper navigation channels. These crucial improvements doubled the hundred-year-old canal’s cargo capacity.

The canal now handles about a third of Asia-to-Americas trade with much greater efficiency. As the industry copes with its downturn, major shipping companies are pooling their resources and using fewer but much bigger ships, which the pre-expansion canal could not have accommodated. A third lane has been added to the canal that accommodates ships large enough to carry up to 14,000 containers, compared with around 5,000 currently. The expansion makes the Panama Canal more competitive with the Suez Canal in Egypt, shortening the one-way journey by sea from Asia to the U.S. East Coast by roughly five days and eliminating the need for a trip around Cape Horn to get to the Atlantic. By 2020, about 10% of the Asia-to-U.S. container traffic will shift from West Coast ports to East Coast terminals.

While NAFTA included certain specific energy provisions, it excluded NAFTA benefits from energy in Mexico because of the Mexican energy regime at the time, including restrictions on private investment in oil and gas and power, which were grandfathered under NAFTA. Following the constitutional reform in 2013 and the subsequent reforms of applicable legislation, there has been discussion about NAFTA’s impact with respect to the energy sectors in Mexico. A renegotiation of NAFTA could include opportunities for Canada and the United States with the benefits of investing in Mexico. Right now, the official interpretation from the Mexican government was that NAFTA did not apply to the energy sectors and, as a result, the Mexican government has the ability to retain and impose certain restrictions (such as with respect to national content).”  However, under NAFTA, importation of the equipment and resources Mexico needs for the energy sector from the U.S. is subject to minimum or no customs duties and taxes or other kind of foreign trade restrictions. That is an important benefit because much of the equipment that is required to perform oil and gas activities—for upstream, or equipment to build midstream and downstream infrastructure and power projects—comes from the U.S. and U.S. power is also a key energy source for economy.

Originally, the president raised the renegotiation of NAFTA in the context of tariffs on imports to advantage the U.S. Mexico is the second-largest recipient (after Canada) of U.S. energy exports, importing billions of dollars in gasoline and natural gas each year. What’s more, crude oil is one of Mexico’s top exports to the United States. The U.S. energy industry’s biggest concerns right now is not disturbing this relationship now that Mexico is inviting in U.S. and foreign investment. In fact, the idea of a new agreement that further coalesces the growing ties to our energy partners in Mexico and this hemisphere seems a more advantageous way for America to go.

This concept of a regional powerhouse, was raised recently by White House National Trade Council Peter Navarro. He focused on the three NAFTA signatories stating the U.S. wants Mexico and Canada to unite in a regional manufacturing “powerhouse” that will keep out parts from other countries. He is also re-examining a critical component of the free trade pact: the rules of origin, which dictates what percentage of a product must be manufactured in the U.S. for it to carry a Made in America label, Navarro said. He said, “We have a tremendous opportunity, with Mexico in particular, to use higher rules of origin to develop a mutually beneficial regional powerhouse where workers and manufacturers on both sides of the border will benefit enormously,” said Navarro. “It’s just as much in their interests as it is in our interests to increase the rules of origin.”

I would posit that we also have great opportunities in the energy space to work more closely together, not just with Mexico and Canada through NAFTA renegotiation but to expand the discussion with other friendly, growth oriented countries within our hemispheric footprint of the Americas to create an America centric energy powerhouse. With our new role in energy transportation and burgeoning resources, why should OPEC get to decide our fate.


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        FROM THE CHART ROOM

        U.S. Energy-Related CO2 Emissions Fell Again In 2016

        co2-emissions-down-in-2016

        U.S. energy-related carbon dioxide (CO2) emissions in 2016 totaled 5,170 million metric tons (MMmt), 1.7% below their 2015 levels, after dropping 2.7% between 2014 and 2015. These recent decreases are consistent with a decade-long trend, with energy-related CO2 emissions 14% below the 2005 level in 2016. Both oil and natural gas consumption were higher in 2016 than in 2015, while coal consumption was significantly lower. Consistent with changes in fuel consumption, energy-related CO2 emissions in 2016 from petroleum and natural gas increased 1.1% and 0.9%, respectively, while coal-related emissions decreased 8.6%. Carbon intensity is a measure that relates CO2 emissions to economic output. Early estimates indicate that gross domestic product (GDP) grew at a rate of 1.6% in 2016, down from 2.6% in 2015. Taken together with a 1.7% decline in energy-related CO2, the 1.6% estimate of economic growth implies a 3.3% decline in the carbon intensity of the U.S. economy. In 2015, carbon intensity of the economy had decreased by 5.3%. The U.S. transportation sector was the only consumption sector where CO2 emissions increased in 2016. CO2 emissions from the transportation sector increased by 1.9%, largely reflecting emissions from motor gasoline, which increased 1.8% in 2016. Emissions from the transportation sector surpassed those from the power sector during 2016—a trend that persists through at least 2040 in the Reference case projections in EIA’s 2017 Annual Energy Outlook. CO2 emissions from the electric power sector fell by 4.9% in 2016. A significant reduction in coal use for electricity generation was offset by increased generation from natural gas and renewable sources. Renewables do not emit CO2, and a shift towards natural gas from coal lowers CO2 because natural gas has lower emissions per unit of energy than coal and because natural gas generators typically use less energy than coal plants to generate each kilowatthour of electricity. Overall, the data indicate about a 5% decline in the carbon intensity of the power sector, a rate that was also realized in 2015. Since 1973, no two consecutive years have seen a decline of this magnitude, and only one other year (2009) has seen a similar decline.” To read more, visit the U.S. Energy Information Administration website.

         


         

         

        Michael Best Strategies’ Energy Team

        About Michael Best Strategies

        Michael Best Strategies focuses on achieving clients’ objectives through unparalleled strategy development and deployment for implementation, pragmatic guidance on public policy development, and government relations. The Strategies team specializes in a full range of services, including government relations, public policy consulting, grassroots advocacy, public affairs, conference planning, and strategic political relationships. For more information, visit michaelbeststrategies.com.