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The United States-Mexico-Canada Agreement: Energy Production and Policies

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The United States-Mexico-Canada Agreement: Energy Production and Policies REPORT 09.17.19 The United States-Mexico- Canada Agreement: Energy Production and Policies David A. Gantz, J.D., J.S.M., Will Clayton Fellow in Trade and International Economics, Mexico Center AMLO will require to carry out many of his INTRODUCTION domestic reforms, including those designed Energy is one of Mexico’s largest exports, to improve the lives of Mexico’s poor. ranking behind only motor vehicles and The focus of this report is on the machinery in dollar terms.1 However, challenges posed by the energy reforms production has steadily decreased in undertaken by the previous administration; recent years, from an average of about the limitations the United States-Mexico- 3.4 million barrels per day (bpd) in the Canada Agreement5 imposes on changes early 2000s to about 1.7 million bpd by in Mexico’s energy policies (such as November 2018.2 Foreign (and other restricting investment in the sector); other Because energy exports private) investment in the energy sector USMCA provisions that could affect energy; are a major source of was restricted to the Mexican state until and a critique of AMLO’s early energy- 2013-14. Then, with a series of more related policy decisions. It also includes a foreign exchange for than 21 legislative changes and three summary of changes in the legal treatment Mexico, maintaining amendments to Mexico’s Constitution,3 of U.S.-Canada energy relations under the and increasing energy led by the Peña-Nieto administration and USMCA compared to Chapter 6 of the North export earnings are American Free Trade Agreement. The report the Institutional Revolutionary Party (PRI) critical to generating but supported as well by the National ends with a short conclusion. Action Party (PAN) and the Party of the the revenues AMLO will Democratic Revolution (PRD, President require to carry out MEXICO’S ENERGY REFORMS AND Andrés Manuel López Obrador’s former AMLO’S CHALLENGES many of his domestic party), the reforms were intended in reforms, including significant part to support the enactment of Key elements of the reforms those designed to financial, education, telecommunications, overwhelmingly approved by Mexico’s 4 improve the lives of and fiscal reforms. The success of the Congress included: López Obrador presidency may well Mexico’s poor. depend on his energy policies, including • Maintaining state ownership of subsoil his treatment of the bloated, inefficient hydrocarbons resources, but allowing state-owned oil company, Pemex, and companies to take ownership of those the ability to continue to attract foreign resources once they are extracted investment in the hydrocarbons sector. and to book reserves for accounting Because energy exports are a major source purposes; of foreign exchange for Mexico, maintaining • Creating four types of contracts for and increasing energy export earnings exploration and production: service are critical to generating the revenues contracts (companies are paid for BAKER INSTITUTE REPORT // 09.17.19 activities done on behalf of the state), petroleum sector by encouraging foreign profit-sharing contracts, production oil companies, including but not limited sharing contracts, and licenses (enabling to those located in the United States, to a company to obtain ownership of the go forward with their investments and oil or gas at the wellhead after it has exploration—which have frequently been paid taxes); postponed since 10 leases were awarded • Opening the refining, transport, in 2017,10 first because of relatively storage, natural gas processing, and low world oil prices but also because of petrochemicals sectors to private uncertainties as to what AMLO’s energy investment; policies will entail. This could encourage • Transforming Pemex into a productive investment in Mexico’s oil sector to go state enterprise with an autonomous forward, despite the fact that world oil budget and a board of directors that prices have fluctuated recently from above does not include union representatives; $75 per barrel to as low as $41 per barrel.11 • Strengthening four federal entities with Still, despite the legal constraints discussed regulatory roles in the hydrocarbons below, it is still possible that AMLO, who industry (the Ministries of Energy and distrusts the energy overhaul12 and has a Finance, the National Hydrocarbons supermajority in the Mexican Congress, Commission or CNH, and the Energy could seek to roll back the Peña-Nieto Regulatory Commission) and creating a administration’s energy reforms. (If this National Agency for Industrial Safety and occurs, the leases awarded in the past While actual exploration Environmental Protection; and to U.S. or Canadian enterprises could be and development has • Establishing a sovereign wealth fund, subject to challenge under the dispute the Mexican Petroleum Fund for settlement provisions of NAFTA Chapter been hampered by Stabilization and Development, to be 11 for up to three years after the USMCA fluctuating oil prices managed by the Central Bank.6 enters into force.) Dealing with Pemex’s in recent years, the While actual exploration and development institutional problems, including a $108 prospects for Mexico has been hampered by fluctuating oil billion debt, will also affect future oil and prices in recent years,7 the prospects for gas production. in the medium and This report further observes that many long term are Mexico in the medium and long term are generally bright. Because of low prices, of the domestic promises AMLO made generally bright. only two of the original 14 blocs found during his campaign and is now seeking bidders in 2015.8 Less than three years to implement, including those related later, in January and March 2018, more to improving education and combating than 70 different firms made over $100 endemic corruption and violence, are billion in new oil investment commitments, largely dependent on AMLO’s ability to important revenue for a government that encourage investment in and gain revenue seeks sweeping social changes.9 However, from the hydrocarbons sector, which whether an increase in oil production, an would permit Mexico to increase its oil influx of capital to Pemex, and reforms and gas exports in the future. Even though to foreign investment in Mexico’s energy the major impact of such investment is sector can all be achieved during AMLO’s not likely to be felt directly during AMLO’s sexenio remains uncertain due to factors sexenio, income from new leases alone both within and beyond his control, as could soon provide some of the funding discussed in this report. for AMLO’s promised reforms. Thus, if the The challenge in my view is enormous. AMLO administration fails to encourage and The statutory and constitutional energy protect new investment in the petroleum reforms engineered by former President sector, in my view his sexenio will be a Enrique Peña-Nieto, if and only if they failure, and will probably result in a level of are supported by AMLO, offer Mexico an social and political instability that Mexico opportunity to re-energize its declining has not seen in many decades. 2 THE UNITED STATES-MEXICO-CANADA AGREEMENT: ENERGY PRODUCTION AND POLICIES favored-nation” clause, agreeing to afford USMCA LEGAL CONSTRAINTS ON other parties (as well as service providers MEXICO’S ENERGY POLICIES and state-owned enterprises) treatment Despite the liberalization of the petroleum regarding energy that is no more restrictive sector beginning in 2013 by the Peña- than treatment Mexico grants to parties Nieto administration, USMCA Chapter 8 of other trade agreements Mexico has specifies that: concluded. The key USMCA provision is as follows: 2. In the case of Mexico, and without prejudice to their rights and remedies Article 32.11: Specific Provision on Cross- available under this agreement, the Border Trade in Services, Investment, and United States and Canada recognize State-Owned Enterprises and Designated that: Monopolies for Mexico (a) Mexico reserves its sovereign right to With respect to the obligations in reform its Constitution and its domestic Chapter 14 (Investment), Chapter 15 legislation; and (Cross-Border Trade in Services), and Chapter 22 (State-Owned Enterprises (b) The Mexican State has the direct, and Designated Monopolies), Mexico inalienable, and imprescriptible reserves the right to adopt or maintain ownership of all hydrocarbons in a measure with respect to a sector or the subsoil of the national territory, sub-sector 32-12 for which Mexico including the continental shelf has not taken a specific reservation in and the exclusive economic zone its schedules to Annexes I, II, and IV located outside the territorial sea and of this agreement, only to the extent adjacent thereto, in strata or deposits, consistent with the least restrictive regardless of their physical conditions measures that Mexico may adopt or 13 pursuant to Mexico’s Constitution. maintain under the terms of applicable Does this mean that the Lopez-Obrador reservations and exceptions to administration could roll back the 2013 parallel obligations in other trade and reforms to Mexico’s energy law permitting investment agreements that Mexico foreign investment in the sector? No, has ratified prior to entry into force because there are other constraints of this agreement, including the WTO in the USMCA to AMLO’s treatment of agreement, without regard to whether energy beyond those included in Chapter those other agreements have entered 8, even though the legal structure of into force.14 (emphasis added) Mexico’s obligations is complex. The Under this clause, Mexico must afford United States’ view is that the Chapter 8 treatment to the United States and to U.S. language essentially states the obvious: investors in sectors covered in the three any sovereign state retains the right to chapters of USMCA listed above that is no change its constitution and laws, even less favorable than treatment Mexico has if such changes may incur international offered in parallel trade and investment responsibility to treaty partners.
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