Oct. 01–While much of the attention of a new North American Free Trade Agreement centered on provisions dealing with the auto and agricultural industries, a lesser-known portion of the pact looks to provide some much-needed certainty for companies like San Diego-based Sempra Energy that have spent billions on projects in Mexico.
“Mexico has come out of this with pretty strong protections for investors in the oil and gas sectors, as well as in telecom infrastructure, and that’s good news for the future of the energy reform,” said Duncan Wood, director of the Mexico Institute at the Washington D.C.-based Wilson Center. “That’s good news, even more so for those companies that have already invested in Mexico.”
Put into effect in 1994, the original NAFTA did not include an energy chapter for Mexico. In 2013, the country enacted sweeping reforms that encouraged companies in foreign countries to make investments aimed at upgrading Mexico’s energy landscape.
Since then, the Mexican government estimates companies have invested as much as $200 billion in various energy projects.
However, there has been concern the incoming president of Mexico, Andrés Manuel López Obrador, may try to roll back energy reform. A left-wing populist, López Obrador has been a long-time critic of the new measures.
The new NAFTA — dubbed the United States, Mexico and Canada Agreement, or USMCA — waters down a dispute resolution provision for multi-national companies operating in other countries. But, crucially, the new deal carves out an exception for some sectors, including oil and natural gas.
“Companies who are heavily invested in Mexico want to make sure that no matter what the government does in Mexico, they have protections in place, that they have recourse to independent tribunals,” Wood said. “The text of the new NAFTA agreement actually does that for them.”
The Wall Street Journal reported one of the agreement’s chapters specifies that once a trade barrier has been eliminated in an industry or sector, it cannot be reintroduced.
In addition, López Obrador was able to extract a promise declaring Mexico has “direct and inalienable ownership” of its hydrocarbons but the agreement also recognizes the rights of U.S. and Canadian investors.
Sempra’s subsidiary in Mexico, IEnova, has been one of the most aggressive companies taking part in the country’s energy reform, investing in more than $7.6 billion.
The projects touch upon virtually the country’s entire energy sphere — including natural gas pipelines, liquid fuels terminals for gasoline and diesel, renewable projects such as solar and wind farms and liquefied natural gas facilities.
Sempra officials said Monday they were “closely” reviewing the agreement.
“The opportunities created by the global energy market have contributed to an energy trade surplus for the U.S. and we are just beginning to tap the potential of U.S.-Mexican energy trade,” senior corporate communications manager Amber Albrecht said in an email. “Mexico expects a significant increase in its natural gas imports in just the next five years and in its per capita electricity consumption during the next 25 years.”
Wall Street responded favorably to the news, with the Dow Jones Industrial Average rising 192.9 points to 26,651.21. Sempra stock was up 8 cents, to $113.83.
Only 7 percent of households in Mexico have access to natural gas and according to the U.S. Energy Information Administration, U.S. gas projects under construction or in the planning stages in Mexico are expected to nearly double by the end of this year.
Oil companies have also made significant investments.
Not surprisingly, the American Petroleum Institute released a statement Monday applauding the new agreement and cited its support for a “requirement that Mexico retain at least (its) current level of openness to U.S. energy investment.”
Under energy reform, Mexico’s national oil company Pemex has been stripped of its monopoly status and competing gas stations from companies that include BP, Gulf and Shell have popped up across the country.
“I think the one group of people that the energy provisions impact upon is really the Mexican consumer,” Wood said. “The Mexican consumer has benefited greatly from the opening up of the refined products market, particularly the gasoline market where they’re getting better service and a better quality product than they were receiving previously.”
The new trade deal still needs to be ratified by the governing bodies of all three countries. Wood said he expects it to pass in Mexico and Canada without too many problems. The situation may be trickier in the U.S., with the November midterm elections looming and Democrats possibly taking over the majority of the House of Representatives and/or the U.S. Senate.
“Will they be as willing to approve this new agreement?” Wood said. “My suspicion is that they will, just simply because of the importance of the agreement … The question is, how long the debate will take.”
If approved, most of the provisions of the $1.2 trillion agreement will go into effect in 2020.
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