August 2019, Vol. 246, No. 8

Mexico Spotlight

New NAFTA  Agreement: Pathway for Oil, Gas

By Richard Nemec,Contributing Correspondent   

A member of the energy intelligentsia in June, after the U.S.-Mexico dispute over immigration was calmed, noted President Donald Trump who was in Texas over that period delivered the message that he favors expanding infrastructure to bolster energy trade with Mexico. 

Thus, even though he appeared to jeopardize the new North American Free Trade Agreement (NAFTA), the energy pro theorized that hurting the U.S. oil and gas industry now is the last thing the president wants to do.

Even with the tensions created over immigration at the U.S. southern border, Mexico’s Senate quickly and overwhelmingly (vote of 114-4) became the first of the three nations to ratify the accord just as summer came to North America. Mexico’s president expressed confidence that the deal would pass, despite the drama that ensued after President Trump’s threat to impose punitive tariffs over migration issues. 

President Andrés Manuel López Obrador, considered a leftist, has long sought to get United States-Mexico-Canada Agreement (USMCA) quickly approved to remove uncertainty for Mexican investors and focus on domestic priorities. 

NAFTA has been squarely in the crosshairs of candidate and now Republican President Trump, making Sept. 30, 2018 when the United States, Canada and Mexico signed a new trilateral continental agreement all the more precedent-setting and historic. 

“While many of the NAFTA’s provisions [including energy] are left intact, there will be changes for ALL companies,” said trade and customs attorney Daniel Ujczo opining last year.  “The time is now to begin these preparations.”


Several underlying facts are undisputed. The United States is the elephant in the room, and it stands to benefit generally from the revised agreement. Canada, which benefited greatly from the original NAFTA, remains in a less certain position, and Mexico, as a totally changed nation from its economy and politics of decades past, stands to benefit nicely from the new deal. 

In addition, energy players in the three nations will not see a lot of major changes, although the energy part of the agreement may still be deceivingly more important because the critical role it plays in other major economic sectors, such as manufacturing and even agriculture.

USMCA overall is credited by its supporters for “modernizing” and “re-balancing” NAFTA, but for the energy sector it goes further, affirming the market reality that the North American energy trade is growing rapidly, and as a result, North American competitiveness promises to shape overall exports. An example is how new agreement provisions clear the way for more hydrocarbon movement by pipeline across international borders.

Mexico’s recent agreement with Trump’s demand that the nation address migration issues should facilitate resolving other binational issues with the United States, including trade and energy, according to scholars at Rice University’s Baker Institute for Public Policy that operates the Mexico Energy Studies Center in Houston. 

“It would be detrimental for all if President Trump takes the border discussion to the energy area, and more importantly, it would damage the image of the United States as a trustworthy trade and business partner,” said one of the Rice center scholars, Adrian Duhalt, a postdoctoral fellow from Mexico. 


Duhalt and others contributing to this report nailed down the quick Mexican national approval within a week or two of it happening in June, but they also cautioned that the U.S congressional action likely would take most of this summer. Eventually the importance of the trilateral trade will overcome domestic politics, Duhalt thinks.

“USMCA must prevail over domestic political preferences and political/domestic differences between member countries,” he said.

One of the main U.S. beneficiaries will be the midstream energy sector as Mexico’s growing energy market will continue to rely on U.S. imports, Duhalt said.

“Midstream infrastructure is what connects U.S. producers and suppliers with infrastructure,” he said. “That’s a message that Trump delivered in his June visit to Houston.”

The American Petroleum Institute (API) calls the North American energy markets “highly integrated and interdependent,” predicting that USMCA will play a “critical role” in enhancing the trilateral integration, interdependence and energy security by eliminating tariffs on all the petroleum products and energy-intensive manufactured goods. 

It promises to be a “foundation” for U.S. investments in Mexico’s natural gas and oil industry, along with liberalizing trade and providing more investment protections. API notes that direct oil and gas U.S. investments in Canada totaled $2.7 billion in 2017 for extraction and $5.5 billion in petroleum pipelines. The same levels of investment are now also potential in Mexico.

Dan Kish, a distinguished senior fellow at the Institute of Energy Research, an arm of Washington, D.C.-based American Energy Alliance (AEA), in April offered the thought that USMCA is an improvement over the existing NAFTA document, and it appears to have the support of each nation’s leader. 

“Now it is just a matter of convincing enough members of the U.S. Congress, but there still could be a gap at a time like this when it is tough to get things done in Washington,” Kish said.

Kish thinks historically the trilateral trade pact has been “pretty good” for the energy sector. 

“We trade a lot in energy, and we’ve got what looks like enormous quantities of energy of all kinds these days,” he said. “With three countries, USMCA allows for strengths of one country to fill in for the shortcomings of an adjacent nation. Those are good things.”

Unsure of when both houses of Congress will act on USMCA, Kish in summer said he believes midstream energy infrastructure issues are not tied to multilateral trade agreements, but are really just a unilateral U.S. matter, and are “being delayed by opponents of the energy that fuels 80% of our economy.” Ultimately, he thinks the problem will be resolved in the courts in both the United States and Canada.

In Mexico, the new president, Andres Manuel Lopez Obrador, or “AMLO,” as he is known, carries concerns about his plans for transportation corridors. “He’s tired of importing so much gasoline, so he wants to fire back up Mexico’s refining capacity that now runs at about 50% capacity [compared to 90%-plus in the U.S.],” Kish said. And to the north, Canada has been dealing with the consequences of too much stranded oil due to the delays in finishing the U.S. part of Keystone XL pipeline.

Worldwide, the USMCA nations make up 28% of the global GDP with the United States accounting for 24%, Canada, 2% and Mexico, 2%. In the U.S. GDP, oil and natural gas account for 8%.

“Energy is always a great multiplier,” said Kish, who has watched the energy sector and NAFTA for a number of years. “All things in the economy are hard to do without energy, so although you don’t count the auto industry as part of oil and gas, absent its fuels to run vehicles, the auto sector would die on the vine.”

With U.S. energy exports to Mexico greatly expanding in recent years, Rice University’s Duhalt notes the pattern of energy trade with Mexico has shifted, and since 2015, the value of U.S. exports has been greater than the value of imports from Mexico – a trend that may widen in the foreseeable future.

“As Mexico has a free trade agreement with the United States, U.S. exports to its southern neighbor do not require an export permit by the [U.S. Department of Energy] DOE,” he said. “That, along with the increasing transport capacity along the binational border, facilitates the flow of natural gas from the U.S. producing regions to Mexico’s power generation plants.”

It is not necessarily easy or clear cut how to quantify the oil and gas sector’s proportion of NAFTA trade, or project what it might be under USMCA. Duhalt to a stab at it, concluding it should grow under the new agreement, although some other projections are more conservative. 

In 2018, the total value of U.S.-Mexico trade reached $611.5 billion, of which $46.3 billion included energy trade (crude oil, natural gas, and petroleum products). Projections are closely dependent on domestic production and demand in each nation.

“In Mexico, the ability to reverse the [ongoing] production decline of petroleum products, natural gas and crude oil will have an impact on the trajectory of imports from the United States,” Duhalt said. “Given the policy decisions of the new Mexican government and the poor financial standing of [the national oil company] Pemex, these imports may continue to increase in the short and medium term.

“Meanwhile, prospects of energy production in the United States are bullish,” he said. “Thus, both scenarios make us anticipate that energy trade will expand under USMCA.”

One of the required U.S. reviews for the new deal is provided by the U.S. International Trade Commission (ITC), a five-member body in the nation’s capital that published its work as Publication #4889 in mid-April, assessing the likely impact of USMCA on the U.S. economy and specific industry sectors, energy being one of them. ITC’s work is required by the Bipartisan Congressional Trade Priorities and Accountability Act of 2015.

Among the highlights of the ITC assessment are the conclusions that USMCA should raise the U.S. real GDP slightly (by $68.2 billion) and overall U.S. employment (176,000 jobs), while adding to the rules of origin requirements in the automotive sector and opening flows of data among the three nations. The most significance for the U.S. economy should come from provisions that reduce policy uncertainty about digital trade and certain rules for the automobile sector.

“Because NAFTA has already eliminated duties on most qualifying goods and significantly reduced nontariff measures, USMCA’s emphasis is on reducing remaining nontariff measures on trade and the U.S. economy,” the ITC report notes.

Overall, ITC’s assessment sees the USMCA’s broad impact on the U.S. economy will be “moderate,” since the U.S. economy is so much bigger relative to the domestic economies in Canada and Mexico, and the reductions in tariff and nontariff barriers already in place from NAFTA.

In the energy sector, ITC concluded that with already low “most-favored-nation” tariffs for the three nations and the effects of the recent energy reforms in Mexico, USMCA’s energy provisions “are likely to have little impact on U.S. trade and production of energy-related products.” 

ITC also points out that the new agreement provides “much narrower exceptions” for Mexico’s energy sector, only allowing Mexico to maintain export license requirements for certain energy products.

Washington, D.C.-based API supports four broad reasons for the United States needing USMCA, even in an environment in which U.S. crude oil imports have dropped in the recent seven-year period of 2010-2017 from 9.2 MMbpd to 7.9 MMbpd. 

Those are: (1) job creation; (2) consumer benefits; (3) stronger energy security; and (4) opening up more markets. “Free and integrated energy markets, easing restrictions on foreign investment, all have been solidified in Canada, and there is the potential for the same investment climate in Mexico,” according to API’s analysis of the new trade pact.

As an example of ongoing benefits from the more open North American markets, API cited four case studies of U.S. refineries that rely on crude supplies from Canada and Mexico that equate to beneficial common products, more good paying jobs and overall economic growth. Those facilities are:

  • ExxonMobil’s Joliet, Ill., refinery with 1,000 workers, 212,000 bpd from Canada, and an output of 248,000 bpd
  • BP’s Whiting, Ind., refinery with 1,700 workers, 301,000 bpd from Canada, and output of 362,000 bpd
  • Shell/Pemex’s Deer Park, Texas, refinery with 2,700 workers, 152,000 bpd from Mexico, and an output of 340,000 bpd
  • Chevron, Pascagoula, Miss., refinery, 4,083 workers, 64,000 bpd from Mexico, and 280,000 bpd outflow.

Analysts and industry organizations emphasize that Mexico and Canada are the two biggest trading partners of the United States, putting more importance on what replaces NAFTA. U.S. governments, companies, workers and consumers are going to continue to have access to the Mexican and Canadian markets. Groups like API stress the importance of free trade.

“In view of the Trump administration’s policy on trade, a sensible response on the part of American industry associations was to voice the importance of the USMCA,” said Rice University’s Duhalt. “What I don’t know is the extent to which these arguments helped shape the agreement.”

On the question of how much attention U.S. energy industry players should devote to USMCA, Duhalt is emphatic:

“It should not only be scrutinized; the USMCA should also be defended and understood by all those companies that are benefiting from it,” he said. “And above all, it should be institutionalized in the sense that free trade in North America should be isolated from political fluctuations in any of the three countries.”

A timely reminder came last spring when Trump’s acting chief of staff, Mick Mulvaney, told a Milken Institute conference in Los Angeles that if Congress eventually fails to ratify USMCA, rather than tear up NAFTA, Trump is likely to let the old agreement stay in effect. In this case, he thinks the existing trilateral trade deal is better than starting from scratch with negotiations among the three neighbors.

Mulvaney, however, did not say that Trump publicly has talked about only two alternatives: approval of the new trade pact or withdrawal from NAFTA. Energy industry representatives clearly would prefer approval of USMCA. P&GJ

 Richard Nemec is a Los Angeles-based writer and regular contributor to P&GJ. He can be reached at

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