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. In other agreements. This is a clear reference to words, under the USMCA, limitations exist the Comprehensive and Progressive Trans- on AMLO’s legal authority to Mexico’s Pacific Partnership Agreement (CPTPP), petroleum laws and policies. which was signed by Mexico in March 2018 This analysis begins by noting and went into force for Mexico and six of that Mexico did not take any specific the 10 other CPTPP parties on December reservations in its USMCA obligations that 30, 2018.15 It would have been preferable would affect investment in the energy in my view that a reference to Chapter sector beyond the stating-the-obvious 8 be included in the list in Article 32.11, language in Chapter 8. However, Mexico but if Article 14 (investment protection) is agrees in the USMCA to a type of “most- included it probably does not matter.

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In the CPTPP/TPP, Mexico listed several when the analysis is widely publicized— specific energy-related reservations.16 as is inevitable when hearings on the Those reservations permit foreign USMCA are held in the U.S. House and investment in the sector under the Senate and in the Mexican Congress— conditions set out in the 2013 legislation some backlash may occur in Mexico. Still, enacted by the Pena-Nieto administration, one can easily understand why AMLO, barring any less favorable treatment. whose representatives participated in Thus, under the proviso quoted above, negotiations several months prior to his incorporating the energy reservations inauguration, did not want to include a agreed to by Mexico in the CPTPP, the straight-forward commitment in USMCA Lopez-Obrador administration (and any Chapter 8 precluding any rollback of the subsequent Mexican governments) may Pena-Nieto energy reforms, even if he not make the rules under which foreign had no intention of doing so at that time. investment is permitted in the energy If AMLO had misgivings about permitting sector any more restrictive than those set further foreign investment in the energy out in the CPTPP annexes. sector in the future, he need only do what Mexico can liberalize the To reiterate, the Pena-Nieto energy he has already done—that is, establish a restrictions on foreign reforms are directly incorporated into three-year moratorium on new leases, as investment contained in CPTPP Annex I-Mexico-17 through Annex discussed below. the Pena-Nieto reforms I-Mexico-27 [page numbers in each case]. The USTR appears to have been equally The effect of this is to make them binding effective in taking into account the views and Annex I without obligations toward the other 10 CPTPP of members of the industry advisory violating either the parties: Mexico can liberalize the restrictions committee throughout the complicated CPTPP or the USMCA on foreign investment contained in the analysis summarized above. They noted (incorporated through Pena-Nieto reforms and Annex I without in their report that “In combination, we Article 32.11), but it violating either the CPTPP or the USMCA believe that Chapter 8 and Chapter 32/ (incorporated through Article 32.11), but Article 11 and the horizontal provisions of cannot make the rules it cannot make the rules more restrictive. the rest of the USMCA all work together to more restrictive. In other words, the minimum level of commit Mexico, Canada, and the U.S. to treatment of foreign investment in Mexico's energy markets that are open to trade with energy sector is established through these each other and open to investment from annexes. And through the operation of each other.”18 USMCA article 32.11, these are the most restrictive measures Mexico may take in its relations with the United States under the INVESTOR PROTECTIONS IN MEXICO’S USMCA (and with Canada, although because PETROLEUM SECTOR Canada is a CPTPP party, it directly has the As discussed in an earlier report in this protections outlined under Annex I of that series,19 the USMCA’s Chapter 14 on agreement). Article 32.11 was thus included investment protections reduces protections at the behest of U.S. negotiators to protect for investors in most sectors compared U.S. energy sector investors in Mexico, now to NAFTA’s Chapter 11. Changes include and in the future. eliminating claims for violations of fair This analysis was confirmed by the and equitable treatment and for pre- Office of the U.S. Trade Representative.17 investment discrimination, as well as Also, in an interview with USTR officials, imposing an exhaustion of local remedies I was assured that members of Mexico’s requirement before an investor may seek USMCA negotiating team, including AMLO's international arbitration. However, Chapter representatives, fully understand the 11-like protection20 is maintained entirely commitments incorporated through these for several sectors that were apparently provisions. While the legal case seems deemed sensitive and for which both the solid to me, I have some uneasiness that Mexican and U.S. governments and U.S.

4 THE UNITED STATES-MEXICO-CANADA AGREEMENT: ENERGY PRODUCTION AND POLICIES

stakeholders wished to assure investor The existing NAFTA agreement protections. These included oil and gas, included a full suite of ISDS investor and electric power production.21 Thus, provisions that protected current for the energy sector, investor-state and future United States investment dispute settlement (ISDS) protection in Canada and Mexico. It allowed not only includes national treatment, the United States energy industry most-favored-nation treatment, and to mitigate the risks associated protection against direct expropriation, with large-scale, capital-intensive, but also guarantees of fair and equitable and long-term projects. The new treatment and protections against indirect renegotiated agreement with expropriation.22 In addition, the exhaustion Mexico has scaled back those ISDS of local remedies requirement does not provisions considerably. While it is apply to energy. greatly appreciated that the major It is evident that a major objective importance of the trade agreement of this coverage, which was accepted by with Mexico and potentially Canada, the then-incoming AMLO administration ISDS protections for the oil & gas, as well as the Trump and Peña-Nieto infrastructure, energy generation, administrations, is to give American and telecommunications sectors has petroleum and natural gas investors a strong been recognized and added to the For the energy sector, sense of confidence in Mexico. It provides new agreement, we would further investor-state dispute investors assurance that should a dispute recommend that a more inclusive settlement (ISDS) arise—for example, between the investor list of energy sources receive the full protection not only and Pemex under an exploration contract or suite of protections to help mitigate lease—the investor would have the recourse investment risk.25 includes national normally expected under investment treatment, most- chapters such as NAFTA Chapter 11 and the APPLICABILITY OF USMCA CHAPTER favored-nation 35 bilateral investment treaties Mexico has 11 TO ENERGY treatment, and concluded with other third parties ranging from the United Kingdom to China.23 A decision by the AMLO administration to protection against For Canadian investment in Mexico’s oil roll back the 2013 energy reforms would direct expropriation, but (or other energy) sectors, the two parties not in itself be a violation of the USMCA’s also guarantees of fair and their affected stakeholders could also technical barriers to trade (TBT) provisions, and equitable treatment which by nature are procedural rather rely on Chapter 9 of the CPTPP, with certain and protections against limitations on the scope of coverage of than substantive. Chapter 11 “applies to investment agreements under the original the preparation, adoption, and application indirect expropriation. Article 9.1 of the CPTPP.24 As I read these of standards, technical regulations, and provisions, ISDS under Chapter 9 of the conformity assessment procedures, CPTPP would not be available to Canadian including any amendments, of central investors that had concluded “investment level of government bodies, which may agreements” with Mexican entities such as affect trade in goods between the parties.” Pemex unless those agreements specifically Changes in technical regulations require provided for ISDS. (Subsidiaries of Canadian that preference be given to international energy firms operating in the United standards and that parties provide a States, or in third countries where bilateral written explanation of any other standard investment treaties with Mexico were in used, with an obligatory exchange of force, would be protected.) information, consultation, and a high level It is notable that the Energy of transparency. The preference is always Sector Advisory Committee expressed toward conformity with international disappointment at the breadth of ISDS in standards and avoidance of regulations that the USMCA: unduly restrict trade, with the other parties to the agreement maintaining the right

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to seek a less trade-restrictive method to fund the project would be bought back from fulfill the regulation’s objective, including investors at par plus accrued interest.28 one based on an international standard. The energy sector in the medium The TBT chapter thus has only limited and longer term may also be affected applicability to oil and gas issues. For by uncertainties surrounding AMLO’s example, if Mexico (or the United States) commitment to spend some $8 billion on proposed a regulation requiring that a gasoline refinery (“Dos Bocas”) along gasoline contain 15% ethanol (instead with the administration’s efforts to reduce of the current 10% standard), the other gasoline imports from the United States by party could invoke the TBT procedures. about 28% from 2018 levels.29 The refinery However, in the unlikely event that Mexico project has created additional skepticism would roll back the current petroleum laws, for investors due to the administration’s the TBT agreement would only be a legal decision in early May 2019 to abandon hurdle procedurally. TBT’s most valuable the effort to solicit financing from private provisions are those related to consultation companies that had qualified for the initial and transparency, giving each party the bidding process (such as Bechtel, Techint, opportunity to discourage another party and WorleyParsons). Instead, AMLO from issuing regulations that restrict trade. indicated that Pemex would undertake the construction on its own using Mexican instead of international design firms.30 AMLO’S QUESTIONABLE PETROLEUM Whether this step results in cost savings POLICIES or a loss of money due to Pemex’s lack of competence or corruption within the Several actions by the AMLO organization remains to be seen. Observers administration have raised questions note that upgrades to Mexico’s gasoline about the nature of AMLO’s foreign refineries promised in the early 2000s investment and administrative policies, have never been completed, and that the including but not limited to petroleum country’s existing refineries are operating production. Perhaps most significantly, at only about one-third of their capacity.31 the then-incoming AMLO government A more general concern is AMLO’s announced in late November 2018 that less-than-rational commitment to an Mexico would suspend further bidding entity—Pemex—that is in serious financial for oil and gas exploration leases until straits, said to be the world’s most indebted 2021.26 The reasons for this decision are oil company with total debt of about $108 not entirely clear, but it appears that billion.32 He has also provided Pemex with the administration wishes to have time $1.3 billion in new tax breaks over six years, to review existing leases for evidence causing some observers to warn that the of corruption or other irregularities. fragility of Pemex’s economic situation Regardless of any justification, the could affect the federal government’s result could be to significantly reduce or ability to borrow more broadly.33 eliminate income from the sale of leases Also, AMLO took steps in January during the first half of AMLO’s sexenio, 2019 to reduce chronic theft of petroleum foregoing a significant source of potential products from pipelines, mostly by criminal revenue to finance his ambitious reforms gangs (a problem ignored by Pemex under and fulfill campaign pledges. previous administrations), which totaled As of spring 2019, the shock of more than $3 billion in 2018.34 Though President-elect AMLO’s decision to abandon it was a worthy objective, by shutting the $13 billion new Mexico City airport down the pipelines and endeavoring project in October following a so-called to deliver gasoline to filling stations by referendum27 had not yet fully dissipated, tanker trucks, the administration caused even though it appeared that at least $1.8 long lines in several parts of the country billion of the $6 billion in bonds issued to and unhappiness among many citizens

6 THE UNITED STATES-MEXICO-CANADA AGREEMENT: ENERGY PRODUCTION AND POLICIES

who needed fuel for business purposes in The text covers such issues as maintaining particular.35 None of these actions related regulatory oversight through authorities to the energy sector has reduced the separate from those that regulate the strong popular support in Mexico for AMLO, industry itself, and also encourages however, who enjoys a 72% approval rating regulatory transparency and procedures for as of early June.36 A more recent cause gaining access to electronic transmission for investor uncertainty is the inclusion in facilities and pipeline networks.42 The Mexico's 2020 budget of an assumption that latter presumably reflects concerns both in Pemex will be able to increase oil production Canada and with the Trump administration to 1.951 million barrels per day, a level that in the United States over the permitting has not been achieved since 1982.37 process and court actions that delayed the Keystone XL pipeline for many years, including at the present time.43 UNITED STATES AND CANADA’S AGREEMENTS ON ENERGY CONCLUSIONS While NAFTA Chapter 6 specified few obligations for Mexico, it imposed The Pena-Nieto era energy reforms offer restrictions on energy trade between the the AMLO administration an opportunity United States and Canada. This included to lay the groundwork for an increase The USMCA may also a ban preventing Canada from reducing in Mexico’s hydrocarbons production in help preserve foreign exports to the United States below the the future, even if the current decline investor confidence by portion of total domestic demand in the past in the country’s production and exports making the traditional three years.38 In other words, Canada could probably could not be fully remedied not reduce petroleum exports to the United between now and 2024 when AMLO’s term ISDS protections States unless it also reduced domestic ends. The USMCA may also help preserve available in the event of consumption of Canadian oil. The ability of foreign investor confidence by making the hydrocarbons-related these two parties to invoke national security traditional ISDS protections available in the disputes with the grounds to limit petroleum exports or event of hydrocarbons-related disputes imports was also circumscribed.39 with the Mexican government or Pemex. Mexican government or Although the United States has in the However, there is no assurance that wise Pemex. However, there past 25 years become the world’s largest energy policies will be pursued. Early is no assurance that oil producer,40 its energy relationship actions by the administration—particularly wise energy policies with Canada was sufficiently important AMLO’s strong support for Pemex, tasking will be pursued. to both parties that they concluded a Pemex to construct a new oil refinery, and side letter/agreement to the USMCA on a moratorium on further lease auctions— energy. However, that agreement departs are more than sufficient to raise questions significantly from NAFTA Chapter 6. The as to whether current policies will stem or USMCA agreement begins by observing that: increase production declines. The parties recognize the importance of enhancing the integration of North American energy markets based on market principles, including open trade and investment among the parties, to support North American energy competitiveness, security, and independence. The parties shall endeavor to promote North American energy cooperation, including with respect to energy security and efficiency, standards, joint analysis, and the development of common approaches.41 7 BAKER INSTITUTE REPORT // 09.17.19

9. See Craig Guthrie, “Amlo and ENDNOTES the Realities of Mexico’s Oil Reform,” 1. Daniel Workman, “Mexico’s Top Ten Petroleum Economist, July 9, 2018, http:// Exports,” WTEx, January 4, 2019, http:// www.petroleum-economist.com/articles/ www.worldstopexports.com/mexicos-top- politics-economics/south-central- exports/. america/2018/amlo-and-the-realities-of- 2. Tsvetana Paraskova, “Can Mexico mexicos-oil-reform. Stop its Oil Production?” Yahoo Finance, 10. “Ten Blocks Awarded under January 24, 2019, https://finance.yahoo. Mexico’s Round 2.1 Lease Sale,” Offshore, com/news/mexico-stop-oil-production- June 20, 2017, https://www.offshore- decline-220000322.html. mag.com/articles/2017/06/ten-blocks- 3. See Diana Villiers Negroponte, awarded-under-mexico- “Mexico’s Energy Reforms Become Law,” second-round-lease-sale.html. Brookings, August 14, 2018, https://www. 11. See “Average Annual OPEC Crude Oil brookings.edu/articles/mexicos-energy- Price from 1960-2018” Statista, https:// reforms-become-law/. www.statista.com/statistics/262858/ 4. See Manuel Rueda, “Peña Nieto change-in-opec-crude-oil-prices- Makes Big Promises to Mexico,” ABC News, since-1960/ . December 1, 2012, https://abcnews.go.com/ 12. Nacha Cattan and Eric Martin, ABC_Univision/News/pea-nieto-makes- “Mexico’s AMLO Takes Office with Attack on big-promises-mexico/story?id=17857633. Energy Overhaul,” Bloomberg, December 5. Agreement between the United 1, 2019, https://www.bloomberg.com/ States of America, the United Mexican news/articles/2018-12-01/lopez-obrador- States, and Canada, Nov. 30, 2018 (not takes-the-reins-in-mexico-vowing-a- in yet in force), Appendix to Annex 4-B, transformation. http://bit.ly/2YSXFL9. 13. USMCA, ch. 8.2. 6. Mexico’s energy reforms were 14. USMCA, art. 32.11. The reference is approved by the Mexican Chamber of obviously to the Trans-Pacific Partnership/ Deputies on December 11, 2013 (95-28) and Comprehensive and Progressive Trans- the Senate on August 5, 2014. See Veronica Pacific Partnership, since at the time the Cantu, Mauricio Garza, Martin Quintero, and USMCA negotiations were concluded, Jaime A. Trevino, “Mexican Energy Reform: Mexico had ratified that agreement but it The New Enacted Hydrocarbons Law,” J.A. had not entered into force. Trevino Abogados, August 7, 2014. http:// 15. CPTPP [Australia, Brunei, Canada, www.jatabogados.com/publications/ Chile, Colombia, Malaysia, Mexico, New articles/The_Mexican_Energy_Reform_-_ Zealand, Peru, Singapore, and Vietnam], The_New_Enacted_Hydrocarbons_Law. March 8, 2018, incorporating by reference pdf. See also Clare Ribando Selke, and with minor changes to the TPP Michael Ratner, M. Angeles Villarreal, Text, https://international.gc.ca/trade- and Phillip Brown, Mexico’s Oil and Gas commerce/trade-agreements-accords- Sector: Background, Reform Efforts, commerciaux/agr-acc/cptpp-ptpgp/text- and Implications for the United States, texte/index.aspx?lang=eng. (The original TPP Washington, D.C.: Congressional Research annexes, including those for Mexico, are not Service, September 28, 2015, 4, https://fas. altered.) Brunei, Chile, Malaysia, and Peru org/sgp/crs/row/R43313.pdf. have not ratified CPTPP as of August 2019. 7. See International Energy Agency, 16. Trans-Pacific Partnership, “Mexico Energy Outlook,” 2016, https:// (Australia, Bahrain, Canada, Chile, Japan, www.iea.org/publications/freepublications/ Malaysia, Mexico, New Zealand, Peru, publication/MexicoEnergyOutlook Singapore, United States, and Vietnam), Executivesummary_WEB_UK.pdf. February 4, 2016 (superseded), Annex 8. Selke et al., “Mexico’s Oil and Gas I-Mexico-17 to 26, https://ustr.gov/trade- Sector,” 7. agreements/free-trade-agreements/trans- pacific-partnership/tpp-full-text. 8 THE UNITED STATES-MEXICO-CANADA AGREEMENT: ENERGY PRODUCTION AND POLICIES

17. Assistant USTR C.J. Mahoney and 28. Justin Villamil, Nacha Cattan, several of his colleagues, in discussion with and Andrea Navarro, “Mexico Peso the author. Rallies as AMLO Resolves Airport Bond 18. Addendum to the Report of the Dispute,” Bloomberg, December 19, 2018, Advisory Committee on Energy and Energy https://www.bloomberg.com/news/ Services, October 25, 2019, https://ustr. articles/2018-12-19/mexcat-bondholders- gov/sites/default/files/files/agreements/ accept-1-8-billion-airport-buyback-offer. FTA/AdvisoryCommitteeReports/ITAC_6_ 29. Robbie Whelan and Rebecca REPORT-Energy_and_Energy_Services_ Elliott, “Mexico Reduces U.S. Gasoline Addendum.pdf. Imports,” The Wall Street Journal, 19. David A. Gantz, The United Sates- January 11, 2019, https://www.wsj.com/ Mexico-Canada Agreement Settlement articles/mexico-reduces-u-s-gasoline- of Disputes, Baker Institute Report no. imports-11547249440. 05.02.19, Rice University’s Baker Institute 30. Amy Stillman and Carlos M. for Public Policy, Houston, Texas, https:// Rodriguez, “Investors Raise Concerns www.bakerinstitute.org/media/files/ as AMLO Hands Refinery Project to files/d14a5a86/bi-report-050219-mex- Pemex,” Bloomberg, May 9, 2019, usmca-3.pdf. https://www.bloomberg.com/news/ 20. Enforcement of such protections articles/2019-05-09/mexico-scraps- would be subject to certain updates tender-for-8-billion-refinery-pemex-to- between 1994 and 2017 to the U.S. take-lead. investment chapter, reflecting inter alia 31. Ibid. Chapter 9 of the TPP. 32. Eric Martin and Justin Villamil, 21. USMCA, annex 14-E. “AMLO Risks His Own Fall as He Tries to Pull 22.USMCA, annex 14-E. Pemex Back from the Brink,” Bloomberg, 23. “Mexico: Bilateral Investment March 20, 2019, https://www.bloomberg. Treaties,” UNCTAD, Investment Policy Hub, com/news/articles/2019-03-20/amlo- http://investmentpolicyhub.unctad.org/ risks-a-fall-as-he-tries-to-pull-pemex- IIA/CountryBits/136. Many, if not most of back-from-the-brink. these treaties, almost certainly exclude 33. Ibid. investment in Mexico’s energy sector, but 34. Megan Specia, “Long Lines not in most of the other sectors covered by and Guarded Fuel: Mexico’s Gas Crisis, USMCA Chapter 14. Explained,” The New York Times, 24. CPTPP, art. 2, annex, para. 2, which January 11, 2019, https://www.nytimes. deletes the definition of “investment com/2019/01/11/world/americas/mexico- agreement” from the revised CPTPP. gas-crisis.html. 25 Report of the Industry Trade 35. Ibid. Advisory Committee on Energy 36. Dave Graham, “Support for Mexican and Energy Services, September President Grows after Trump Tariff Threat,” 27, 2018, 4, https://ustr.gov/sites/ Reuters, June 4, 2019, https://www.reuters. default/files/files/agreements/FTA/ com/article/us-usa-trade-mexico-polls/ AdvisoryCommitteeReports/ITAC%206%20 support-for-mexican-president-grows- REPORT%20-%20Energy%20and%20 after-trump-tariff-threat-idUSKCN1T52JS. Energy%20Services.pdf. 37. Amy Stillman, Nacha Cattan and 26. “Mexico E&P Auctions on Hold Eric Martin, "Mexican Budget Assumes until 2021: Report,” The Oil and Gas Year Oil OUtput Surge Not Seen Since 1982," (blog), November 21, 2018, https://www. Bloomberg.com, September 9, 2019, theoilandgasyear.com/news/mexico-ep- https://www.bloomberg.com/news/ auctions-on-hold-until-2021-report/. articles/2019-09-09/mexico-s-budget- 27. Cattan and Martin, “Mexico’s assumes-an-oil-output-surge-not-seen- AMLO Takes Office with Attack on Energy since-1982. Overhaul.”

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38. North American Free Trade AUTHOR Agreement (U.S.-Mex.-Can.), December 8, 1993, art. 605, https://www.nafta-sec- David A. Gantz, J.D., J.S.M., is the Will alena.org/Home/Texts-of-the-Agreement/ Clayton Fellow in Trade and International North-American-Free-Trade-Agreement. Economics at the Center for the United 39. NAFTA, art. 606. States and Mexico whose work focuses 40. Douglas A. McIntire, “US to on international trade and economics. He be World’s Largest Oil Producer in is also the Samuel M. Fegtly Professor of 2019,” 24/7 Wall St., January 18, Law Emeritus at the University of Arizona’s 2019, https://247wallst.com/energy- James E. Rogers College of Law and director economy/2019/01/18/us-to-be-worlds- emeritus of the international trade and largest-oil-producer-in-2019/. business law program. Gantz has written 41. USMCA, Canada and Mexico side extensively on World Trade Organization agreement on energy, November 30, 2018, and NAFTA trade law and dispute resolution https://ustr.gov/sites/default/files/files/ issues, as well as a range of other agreements/FTA/USMCA/Text/CA-US_Side_ international trade matters. Letter_on_Energy.pdf. 42. Ibid., arts. 4, 5. 43. See Lisa Friedman and Coral Davenport, “Judge Blocks Disputed Keystone XL Pipeline in Setback for Trump, The New York Times, November 9, 2018, https://www.nytimes.com/2018/11/09/ climate/judge-blocks-keystone-pipeline.

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Cite as: Gantz, David A. 2019. The United States-Mexico-Canada Agreement: Energy Production and Policies. Baker Institute Report no. 09.17.19. Rice University’s Baker Institute for Public Policy, Houston, Texas. https://doi.org/10.25613/P1YM-4J94