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U.S. Oil Interests In Jeopardy If Key NAFTA Provision Is Removed

A group of more than 100 GOP Senators and House Representatives has called on President Trump to keep investor protection provisions in NAFTA intact. Otherwise, the group says, U.S. investments in Mexico’s oil and gas industry would come under threat.

The legislators detailed their concerns in a letter to U.S. Trade Representative Ambassador Robert Lighthizer, cited by S&P Platts. They urged the President to keep these provisions intact to reassure U.S. companies investing south of the border that their investments are safe, and should an issue arise between a U.S. company operating in Mexico and the government, there will be a mechanism in place allowing the company to seek international arbitration to settle the issue.

The importance of these investor protection provisions seems to be more prominent now than before as the frontrunner for the Mexican elections this summer is leftist Andres Manuel Lopez Obrador from the Morena party, who has more than once said that he will review all oil contracts inked by the Pena Nieto government with foreign oil companies.

These oil contracts are part of the foray of U.S. energy companies into Mexico following a wide energy sector reform enacted in 2013. As a result of the reform, after an initially slow start to attracting foreign investment, Mexico’s offshore oil auctions have recently started paying off, after an alliance (including foreign firms) announced a “world class discovery” estimated to hold more than 1 billion barrels of oil in place—one of the major global discoveries in the past five years.

Related: The Oil Major That Won’t Leave Iran

In addition, supermajors Exxon, Chevron, and BP are opening or plan to open their first service stations to tap into the Mexican refined products market. Shell is the latest Big Oil player to enter the retail market, pledging US$1 billion in investment over the next 10 years.

S&P Platts’ Meghan Gordon notes that the investor protections under NAFTA have been instrumental in this influx of U.S. and transnational energy company investments in Mexico, so removing them could jeopardize these and future investments, especially in light of Obrador’s suggestions he would try to undo the energy reform.

Of course, whether he would really attempt such a move is unclear, not simply because he may face constitutional restrictions in his actions regarding the reform, but also because Mexico needs higher oil and gas production and Pemex is in no position to go it alone in achieving this goal.

And it is not just the most likely next Mexican president that is making legislators nervous. Some are concerned that Mexico and Canada have already started negotiating their separate, bilateral, investor protection mechanisms. I'm deeply concerned about reports that Mexico and Canada have begun negotiating bilateral ISDS provisions without us, because USTR said it doesn't want to participate in that," the chairman of the House Ways and Means Committee, Kevin Brady, said during a committee hearing of Lighthizer.

Related: Oil Markets Should Fear A Demand Shortage

The U.S. Trade Representative countered the concern of the congressmen noting that there are other ways to ensure an investment abroad, such as adding special clauses to that effect in their contracts with the foreign government and state-to-state dispute settlement channels. These, Lighthizer said, were used effectively before NAFTA and its investor protection provisions came into force.

If Lighthizer’s stance is any indication, Washington is unhappy with the investor protection mechanism of NAFTA. However, as committee chairman Brady pointed out, American businesses want to know who has their back when they invest abroad, which for the legislators seems to be the crux of the matter.

Yet NAFTA protects investors from all three signatory countries, not just U.S. ones, which seems to be Lighthizer’s concern and the government’s. The investor protection debate seems to be the latest sign that the renegotiation talks will continue to drag as they have dragged so far.

By Irina Slav for Oilprice.com

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