Antonio Ortiz-Mena on NAFTA's energy trade negotiations

Energy, a Bright Spot in Nafta Talks, Bogged Down by Dispute Over Rule Change

  • Expanding Nafta to cover oil trade has many backers. But energy companies are balking at a U.S. bid to drop a rule meant to protect investors from government intervention

The Trump administration is at odds with American companies over a proposed rule change to the North American Free Trade Agreement that is endangering a bright spot—energy—in contentious treaty talks.

All three Nafta countries—the U.S, Canada and Mexico—agree that a new treaty should aid the burgeoning energy trade. Under negotiation are initiatives to ease the construction of pipelines across borders, to aid U.S. exports of natural gas and to assist American companies opening gas stations or explore for oil in Mexico, officials say.

The proposals would also prevent Mexico from backsliding on liberalizing of its energy sector at a moment when American industry is seizing a growing role in Mexican energy.

U.S. businesses, however, including some energy companies, are balking at Washington’s pursuit of an unrelated rule change that would weaken or end Nafta’s protection of U.S. investments in Mexico or Canada from government intervention.

At issue is the Investor-State Dispute Settlement, which allows a U.S. business to take legal action if a foreign government harms the company’s investment in that country. For example, if the Mexican government nationalized, say, a U.S-owned oilrig in Mexico, the measure would give the American company the right to appeal to adjudicating panels set up under Nafta.

Shifting Terrain

The U.S. has become a net exporter of energy to Mexico in recent years, as its oil imports fall and exports of petroleum products, fuel oil and natural gas rise.

The protections are valued by a variety of U.S. industries, from manufacturing to financial services. But they are especially vital to the U.S. energy sector. Energy sector investments typically require substantial investment “before the first barrel comes out,” said Mexican Finance Minister José Antonio González Anaya, a former chief of Mexico’s state oil giant Petróleos Mexicanos, in an interview.

U.S. Trade Representative Robert Lighthizer is proposing the three member countries eliminate the Nafta protections, saying they create an incentive for U.S. companies to invest internationally and move jobs overseas. “Why is it a good policy of the United States government to encourage investment in Mexico?,” asked Mr. Lighthizer at a Congressional forum late last year.

U.S. business interests, from American Petroleum Institute to the U.S. Chamber of Commerce, are lobbying to pressure the Trump administration to retain the protections, saying they help “ensure that American investors, businesses and their workers will be treated fairly overseas,” according to the petroleum institute. Canada and Mexico have also objected to the Trump administration proposal.

U.S. businesses say they might withhold support of a re-negotiated treaty because of the importance they place on the dispute settlement. Such a scenario could complicate winning Congressional support to complete a new deal, given business groups have many sympathetic voices in U.S. Congress.

“Energy and digital trade were two areas where it made sense to upgrade Nafta and to pursue a Nafta 2.0,” said Congressman William Hurd, a Texas Republican whose district stretches along most of the state’s border with Mexico. However, “the international dispute chapter is preventing some of the other chapters, like energy, from being closed out.”

Mr. Lighthizer met with his Mexican and Canadian counterparts last week in Washington in an effort to reach a deal possibly as early as next week. The energy trade is attractive to Washington because in recent years the U.S. has begun exporting more energy to Mexico than it imports, reducing the U.S. trade deficit with Mexico—a major goal of the Trump administration.

When Nafta was first negotiated in the 1990s, few provisions pertained to the energy industry. Mexico’s constitution then blocked foreign energy ownership. But in 2013 Mexico amended its constitution to open its energy industry, as U.S. oil and gas production began to soar.

Foreign investment has since poured into Mexico’s energy sector. The government has held nine auctions for oil blocks that is sparking billions of dollars in investment. Foreign companies also began to buy gasoline stations and sell directly to Mexican consumers in an 800,000-barrel-a-day market. Pipelines are being built across the U.S.-Mexico border and Mexico is buying increasing amounts of U.S. natural gas.

“When the USTR thinks about this, it’s thinking about the auto industry, and `why should the auto industry get special protection to invest in Mexico when they should invest in the U.S.?’” said Antonio Ortiz-Mena, a senior vice president at Albright Stonebridge Group, a business advisory group, and a former Mexican economic official.

“But in the case of energy, you invest where the oil is,” he said. “If there’s oil in the Gulf of Mexico and you want to invest in deep sea drilling, it’s not as if you could do that in Detroit.”

Mexican President Enrique Peña Nieto is trying to solidify his energy market opening initiatives ahead of presidential elections on July 1. Many believe the frontrunner, leftist presidential candidate Andrés Manuel López Obrador, might try to roll it back. Mr. López Obrador has said he’d hold off on new auctions while he reviews energy contracts to ensure they are benefitting Mexico.

“The ongoing energy opening could be at risk if a new administration decided to shift course,” Morgan Stanley said in a recent note to investors.