Oil and gas is proving to be a sticking point in the NAFTA renegotiations, with the incoming Mexican president hoping to exclude the chapter on energy from the trade deal.
To be sure there have been a series of issues that have divided the three countries. Many of them have been resolved but even at this late date some outstanding issues remain. The U.S. and Mexico are close to hammering out their differences on cars, which would allow Canada to rejoin the talks. The three countries have not agreed on dispute resolution mechanisms, and the U.S. wants the deal to sunset every five years, which would require them to periodically renew the trade pact, a provision that Canada and Mexico oppose because it would create uncertainty.
But oil and gas are also shaping up to be a point of tension, which is an unexpected development. Incoming President Andres Manuel Lopez Obrador (often referred to as AMLO), who takes office in December, opposes the energy chapter in NAFTA, even as the current administration supports it, according to the Wall Street Journal. Energy was not included in the original NAFTA deal ratified in the 1990s because Mexico’s energy sector was under state control. That changed in 2013-2014 when President Enrique Pena Nieto succeeded in ending seven decades of government monopoly. Related: The Next Major Challenge For Norway’s Oil Industry
AMLO was opposed to those energy reforms when they passed, and while he has since softened his stance on the partial-privatization of oil, gas and electricity, his team is holding up the NAFTA negotiations over energy. “The energy sector was on the table, but it wasn’t a matter of concern. It was rather a technical issue on how to reflect Mexico’s overhaul in the treaty,” Carlos Véjar, a trade attorney at law firm Holland & Knight in Mexico City, told the Wall Street Journal. “Excluding it could change the scope of the negotiation, given that this is the sector that currently has the highest investment volumes.”
AMLO opposes the energy chapter because it would restrict his authority to intervene domestically into the oil and gas sector. Mexico’s energy reforms have been solidified as part of constitutional changes, making them difficult for AMLO to scrap. But including energy reforms as part of NAFTA would subject them to international legal protections as well.
In theory, as part of the investor-state dispute settlement process, if the Mexican government under AMLO passed a law or regulation that disrupted the investment of an international oil company, the oil company could initiate a complaint under NAFTA and have it heard by an independent tribunal. Ultimately, the tribunal could decide against a state or federal law that negatively impacts the profits of a foreign oil company in Mexico. Some view this as providing investors certainty, a business-friendly legal protection that will open up Mexico to more investment. Others, particularly in AMLO’s camp, view this as subverting state authority and elevating corporate power. Related: Venezuela Takes Unprecedented Action To Stabilize Currency
U.S. and Mexican trade negotiators are meeting this week, and are hoping to quickly wrap up talks before the end of the month, which would allow Canada to rejoin talks. There is pressure on them to approve the renegotiated trade deal before AMLO takes office in December.
However, even though AMLO has yet to take office, he is not without leverage. The NAFTA deal would need to be submitted for approval in the Mexican Senate, where AMLO’s party, Morena, will soon control a majority. As such, Mexico’s negotiators, even though they are Pena Nieto’s team, are having to consult with AMLO’s advisers to make sure they are on board with the contents of the new NAFTA deal.
At this point, the U.S. and Mexico are very close to a breakthrough, and there are news reports that suggest a “handshake” agreement will be announced on Thursday. It seems unlikely that the energy chapter will hold up the enormous pressure and momentum to get a deal done.
The implications are profound. The U.S. and Mexico are becoming increasingly integrated on energy. A series of natural gas pipelines are under construction that will ferry higher volumes of gas from the Permian and the Eagle Ford to the Mexican electricity grid. Also, a growing number of American oil companies, as well as others from around the globe, are pouring billions of dollars into Mexico’s offshore oil sector. AMLO opposed such a prospect several years ago, but fiscal pressures alone will likely keep his administration in line.
By Nick Cunningham of Oilprice.com
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