The energy sector and the relationship between the US and Mexico

July 2017 | EXPERT BRIEFING | SECTOR ANALYSIS

financierworldwide.com

The first 100 days of president Trump’s administration showed the world how to separate rhetoric from reality. Had we taken his campaign messages too seriously, the world would be facing the beginning of the end of free foreign trade and investment and Mexico’s energy reform, heavily reliant on US commodities and investment, would need to turn to alternatives such as Latin America or Europe. However, a president that promised to “make America great again” would not venture to take unpopular decisions for America’s oil companies to grow and participate in an increasingly growing market, such as Mexico.

Donald Trump is a pro-energy president. Ever since he started campaigning he promised to be the “greatest jobs president God ever created”. Trump kept his word and as promised, one of the first acts was to sign two executive orders supporting two controversial oil pipelines, which will create approximately 28,000 jobs.

The Keystone XL Pipeline is a 1179 mile pipeline that runs from Alberta, Canada to Steele City, Nebraska, where it will join an existing pipeline that goes through Texas, ending up in the Gulf. This pipeline will carry 830,000 barrels of oil each day. In the previous administration, there was no presidential permit issued, and the Environmental Protection Agency (EPA) advised Obama not to approve this construction.

Dakota Access, also known as Bakken Pipeline, is a 1172 mile pipeline that runs from North Dakota through South Dakota, Iowa, Illinois and ends up in Texas. In January 2017, president Trump delivered a memorandum to the United States Army Corps of Engineers (USACE) to execute the project which had also been blocked by the Obama administration.

The 45th president of the US proclaimed his Energy Independence executive order in the EPA’s headquarters on 28 March 2017. President Trump had also proposed a budget for the EPA that would eliminate 50 of its programmes and 3200 jobs. Regardless of its approval, it seems the EPA may be slowly dismantled. President Trump is working toward eliminating institutions and job-killing laws against energy.

Trump is a pro-energy president who has filled his cabinet with energy leaders. Over the last few decades, Republicans have been closely related with the oil & gas industry. Trump’s main men, are, among others, Secretary of State Rex Tillerson (ExxonMobil’s director), Harold Hamm, Energy Secretary (pioneer for the development of the shale oil resources), and Oklahoma’s attorney Scott Pruitt, who runs the EPA, an agency he fought against during the Obama presidency, when the president held a strong regulatory agenda.

Mexico relies on US investments

José Antonio González Anaya, director of Petróleos Mexicanos (Pemex) recently stated in a conference held at Mexico’s Autonomous Institute of Technology (ITAM), that there is a $15bn deficit in transportation and gasoline storage in Mexico. Pemex has made no investments in these matters because it has directed its resources to concentrate on extracting crude oil, which it finds a more profitable activity.

Alongside Mexico’s hydrocarbon deficit stands that of gasoline and diesel. Mexico is the most important importer of gasoline for the US. Five out of 10 litres of gasoline in Mexico come from its neighbour. In 2016, the US produced 231 million barrels, 120.3 million of which were bought by Mexico. It was reported by Mexican authorities that the country alone buys the amount of gasoline equivalent to 68 other countries to its northern neighbour.

The US Energy Information Administration (EIA) has reported that by 2017, Mexico’s need for gasoline will increase by 45 percent. Pemex, has reported that in 2016 it disbursed $11.9m in gasoline and $4.1m in diesel. The price of a barrel in 2016 was $67.60, while the price for the same amount in 2017 is $73.10.

President Trump does not represent a threat to Mexico’s 2013 Energy Reform; in fact, he is its greatest ally. President Trump wants to reactivate his country’s energy sector, create jobs for his people and collect taxes from those Americans winning tenders, rounds and farm outs in Mexico.

Supporting Mexican reforms and its recent openness toward the international market could mean a financial windfall for the US. If American companies continue to show interest in their southern neighbour, this could mean a reactivation of many divisions of its economy. American companies could offer jobs to other Americans in exploration, production, transportation and storage equipment, among many others.

NAFTA and Trump

Fellow partners of the North American Free Trade Agreement (NAFTA) and Trans-Pacific Partnership Agreement (TPP) did not know what to expect when among his campaign promises, president Trump announced a possible withdrawal or renegotiation of the NAFTA.

The truth is, Canada and Mexico should be far from scared by now. On 18 May 2017, Trump announced, through a letter presented to Congress by Robert Lighthizer (Commerce Representative), that he intends to renegotiate NAFTA. Ninety days after Congress agrees, negotiations with partners may start.

Negotiations of NAFTA can benefit all parties. Mexico could benefit from it by adding a complete energy chapter, since NAFTA was signed when the monopoly of the energy sector belonged to Pemex, which recently changed with the 2013 Energy Reform. The US can benefit from the new procedures foreseen in the reform, while they may continue to buy cheap crude oil barrels from their southern neighbour. Canada can continue to benefit from the openness toward the energy sector that the president reflects and might continue to get good deals like the one just granted in the Keystone XL Pipeline.

On the other hand, NAFTA is quite an outdated agreement that does not reflect the needs of the 21st century. Mexican representatives have already expressed their support of these negotiations, as this government agrees a modern instrument is needed to regulate the trading and economic relationship.

Among the things that must be renegotiated, and which was included in Trump’s letter, is intellectual property rights, regulatory practices, state-owned enterprises, services, customs procedures, sanitary and phytosanitary measures, labour, environment and small and medium enterprises.

Congress may delay official trade negotiations until 15 August 2017 but this does not prevent the three countries from engaging in opening consultations.

The coming months will shape the energy sector’s course and progress in the years to come. In the midst of uncertainty, the first 100 days of Trump have proven that though the transition may be slow, investment and energy development shall prevail. The energy reform has proven its maturity to welcome long-term private investment and even if Trump’s policies do have a significant impact on the continent’s energy production, they are likely to benefit Mexico rather than harm it.

Diana María Pineda Esteban is a senior associate and Laura Fernanda Reyes Gómez is a junior associate at González Calvillo, S.C. Ms Pineda can be contacted on +52 (55) 5202 7622 or by email: dpineda@gcsc.com.mx. Ms Reyes can be contacted on +52(55) 3979 5691 or by email: lreyes@gcsc.com.mx.

Diana María Pineda Esteban and Laura Fernanda Reyes Gómez

González Calvillo, S.C.