Amid U.S.-Mexico acrimony, energy might present common ground and opportunity, analysts say

February 26, 2017

President Trump has repeatedly said he wants to renegotiate NAFTA and railed at U.S. companies that moved operations to Mexico. His administration has suggested imposing punitive tariffs, and he continues to say he’ll make Mexico pay for a wall on its norther border.

South of that border, Mexico’s foreign secretary reportedly told Mexican lawmakers in private that the country is prepared to impose tariffs of its own. According to news reports, Luis Videgaray said the Mexican government is bracing for a long “battle” with the Trump administration.

Such cross-border talk has raised fears north and south about possible bruising effects on various industries, such as automobile manufacturing and agriculture.

But many analysts agree that in at least one sector — energy — the two countries still share opportunities for financial gain and have less incentive for conflict. Even if some terms of the North American Free Trade Agreement change, they say, energy can remain a boon for both countries’ economies, along with that of Canada.

Ixchel Castro, the manager of oil and refining research in Latin America for the consulting firm Wood Mackenzie, said the involvement of former Exxon Mobil Chief Executive and current Secretary of State Rex Tillerson, who visited Mexico City last week, was a good sign.

“Someone from Exxon Mobil understands very well how this mutual collaboration has been a win-win in the last few years,” Castro said.

Two of President Trump’s Cabinet secretaries and their Mexican counterparts emphasized cooperation and friendship after two days of talks in Mexico — but the meetings seemed unlikely to quell profound tension between the two countries or clear up confusion over the plans of the Trump administration.

Castro was referring to the changes that President Enrique Peña Nieto signed into law in 2013, opening the Mexican oil industry to foreign investment. It was a groundbreaking move. Petroleos Mexicanos, or Pemex, had been a state monopoly since 1938, and has long been beset by mismanagement, corruption and nepotism.

“Pemex has always worked as an appendix of the government and Ministry of Finance, and worked less as an oil company,” said Ariel Ramos, a partner at Mayer Brown, a legal services firm in Mexico City, and a NAFTA and energy expert. “Most decisions it made were more politically driven and driven by the federal budget than operationally driven.”

For decades, Pemex has been the federal government’s piggy bank and crutch. Critics say that because profits haven’t been well-invested, its infrastructure and technology are tired and its production down. And when the government eased gasoline subsidies in December, prices jumped 20% for premium gas (and 14% for regular) the next month. Protests, sometimes violent, broke out nationwide.

But for foreign investors, Pemex’s problems — and Mexico’s resources — present opportunity.

“In the U.S., they’re still discovering new reserves, but they’re more difficult for production,” Ramos said. “It would be easier to just cross the border and start operation on the Mexican side than to go to areas of the U.S. with more complexity and cost.”

For example, consider the Eagle Ford Shale, the oil-rich geological formation that has been tapped in Texas thanks to fracking and other technology. The formation continues into Mexico, but has not been developed there because of lack of technology, investment and infrastructure, according to Ramos.

NAFTA, which took effect in 1994, eliminated most tariffs among the United States, Mexico and Canada. Energy wasn’t its prime focus, but the deal grandfathered in Mexico’s laws at the time concerning foreign companies working in the energy sector, Ramos said.

Ellen R. Wald, a U.S.-based energy and geopolitics analyst, explained the exceptions made for Mexico that remain in NAFTA with the example of a Texas company that produces energy in Mexico and sells it back to its customers in Texas. Under NAFTA, the company would be required to sell any excess power to Mexico’s federal electricity commission — and at a rate set by the commission.

But Ramos said that rule and ones like it have essentially fallen from use since Peña Nieto opened the oil industry to foreign investment three years ago. He says that, because these rules are no longer in effect, they would not constitute a major part of renegotiations.

Wald takes a somewhat different view. Again, consider this example of the Texas company in Mexico. Peña Nieto’s more liberal policies benefit such companies, but future presidential administrations could, hypothetically, backtrack, she said.

“What if next year the Mexican government decides it’s done with liberalization?” she asked. A new NAFTA could put Peña Nieto’s open energy policies more firmly in place, she said.

Wald stressed the importance of creating regional stability when it comes to energy. “You can decide where to plant your field of wheat, but you can’t decide where oil and gas will be. Having the ability to work together as neighbors is more efficient when providing energy security,” she said.

Mexico-based energy analyst David Shields said that it would be unlikely for Trump to pursue tariffs on energy. That’s because the U.S. sells more energy to Mexico than it imports.

If Trump’s main intention were to hurt Mexico’s economy, “he could stop buying crude from Mexico and buy it from somewhere else, but that’s not good business. We understand Mr. Trump to be a businessman,” Shields said.

Ramos suggested that, when it comes to energy, Mexico can use certain regulations that still represent barriers to investment as bargaining chips with the United States.

For example, Mexican law requires that companies engaged in energy initiatives use at least a certain percentage of Mexican contents — that is, raw materials and workforce.

Ramos suggests that Mexico could relax such requirements, allowing U.S. and Canadian firms greater freedom in whom to hire and what sort of material to use. Such an offer could improve the odds of Mexico getting a better deal in other sectors, such as agriculture.

Regionally, the United States, Canada and Mexico have a lot to gain from collaborating in the market for fossil fuels.

“Energy reform in Mexico represents a possibility of creating an energy hub that would have almost no rivalry worldwide,” Ramos said. Still, he said, that doesn’t make this a good time to revisit NAFTA.

“Any revision of NAFTA would not be done under ordinary trade negotiations, because of the stance the U.S. is taking on other issues as well — binational security, drug smuggling and immigration,” Ramos said. “Unfortunately, all of these other issues would contaminate a discussion and revision.”

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Tillman is a special correspondent.

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