September 15, 2017

The United States’ Energy Objectives in the NAFTA Renegotiation

By José María Lujambio

In mid-July, the United States government issued a 17 page document summarizing the country’s goals for the renegotiation of the North American Free Trade Agreement (NAFTA). It is noteworthy that the section on energy contains only three lines, but with huge substance and meaning:

Preserve and strengthen investment, market access, and state-owned enterprise disciplines, benefiting energy production and transmission and support North American energy security and independence, while promoting continuing energy market-opening reforms.

The Mexican reforms of 2013 and 2014 ended the state’s monopoly on the energy sector and welcomed competition. As a result, great opportunities for private investment in the Mexican energy sector, both domestic and foreign, arose. It was obvious that this opening would awaken the appetite of U.S. companies to invest in Mexico and gain access to new markets. As there has been progress and clarity in the implementation of the reforms, more and more U.S. companies are establishing subsidiaries in Mexico. Additionally, many of such companies have applied for permits required for their activities and have started executing contracts in all the segments of the hydrocarbons and electricity subsectors.

Mexico is increasingly dependent on its northern neighbor to ensure its own energy security. A key phenomenon this decade has been the growth of U.S. natural gas imports into Mexican territory, offsetting the dramatic decline in domestic production. This has been possible thanks to a number of cross-border gas pipeline systems such as Los Ramones, the axis from Waha, Texas to Guadalajara, and the new Pacific corridor. Today, U.S. natural gas exported to Mexican territory totals 4 billion cubic feet per day, in contrast to only 1 billion in 2010. Some of the new gas pipelines are still under construction and are expected to start operations in the coming months and throughout 2018. Therefore, natural gas exports could grow to 7 billion cubic feet per day by 2022, satisfying about three-quarters of estimated national demand.

However, the United States wants its companies to participate in the natural gas, refined products and electricity markets under open access conditions and with strong regulation over State enterprises, which still have substantial power.

In mid-August, a forum on natural gas took place in San Antonio, Texas. In such forum, Commissioner Héctor Moreira of Mexico’s National Hydrocarbons Commission emphasized that regulators in the energy sector will inject discipline into the operations of State enterprises. Such discipline, though, is not because of a U.S. government request, but because it is a legal mandate. Strong and effective regulation of economic agents with market power will always be salutary, regardless of whether they are private or public.