North American Energy Alliance: The Formation of an Energy nafta



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Justin Dargin

Michigan State College of Law

Concentration: International Law and Energy Law

Suggestions or Comments: Darginju@msu.edu

North American Energy Alliance: The Formation of an Energy NAFTA


One of the strategic policies of the current Bush administration is the formation of a North America Energy Alliance (NAEA), which President Bush touted during his 2000 presidential campaign. This North American Energy Market, as President Bush termed it, was to incorporate full privatization of Mexico’s state-run electricity generating and petroleum sectors. While this is hardly a viable option, much less a desirable one, an integrated North American Energy Market does deserve a look to see if it can provide lasting benefits to all three nations involved. The main questions that would need to be answered would be: whether a common integrated energy market can be built using the legal framework of NAFTA? What are the potential ramifications for Mexico, the U.S. and Canada and the opportunities for energy related trade? Can a viable North American Energy Strategy be established while respecting the gains made during the Mexican Revolution and the subsequent constitutional reform?
Energy trade between the U.S and Mexico is primarily a one-way street, with Mexico providing and the U.S. consuming. There is some natural gas exportation from the U.S. to the Mexican border states, although it is infinitesimal when compared to the entire transnational energy trade.
Mexico’s constitution placed all subsoil minerals under the control of the state (Article 27 of the 1917 constitution), while a nationalized energy corporation was formed in 1938 (PEMEX) to control extraction and production. It is possible to envision a scenario whereby Mexico will have access to high-grade technology transfers, hard currency financing for PEMEX, and energy demand security, and conversely the U.S. can stabilize access to Mexican oil, thereby promoting both supply and demand security. Both parties can experience a stabilization of prices which can mitigate the periodic economic shocks that occur with market shifts of natural resource economies. All of this can be achieved while adhering strictly to the Mexican constitutional and legislative framework and respecting Mexico’s sovereignty over its natural resources.
In order to determine the shape of any possible transnational integrated energy system, we will have to take a look at the relevant energy provisions of NAFTA. NAFTA will serve as a basis for the probable framework, as the legal obligations of the NAFTA energy provisions will likely be the linchpin of any potential alliance. NAFTA establishes the operating template for energy trade, but in no way does it erase the borders of the nations involved.
Chapter six of NAFTA relates specifically to energy. NAFTA drew upon the General Agreement on Trade and Tariffs (GATT) energy provisions for its inspiration. Thus, chapter six serves to clarify and extend the GATT obligations. However, before delving into that, we should take into consideration NAFTA's “Preamble,” which mandates that the three governments resolve to create a legal framework for an expanded market in order to minimize trade dislocations, and to promote sustainable development. (See NAFTA Preamble) Similar to the WTO (the successor to GATT), NAFTA prohibits restrictions on energy related trade and basic petrochemicals among member nations. However, if one of the NAFTA countries restricts energy exports or imports to non-NAFTA nations, the remaining NAFTA nations are constrained to act within the trade ceiling. (Art. 603(3))
Even though NAFTA also allows member states to designate a monopoly or a state enterprise, these newly created corporate bodies may not be used to undercut the spirit of the Agreement and may not be utilized as a spring board to introduce trade distortive practices in non-monopolized sectors. (Art. 1502 and 1503). In what may seem like a head-punch to free trade principles, NAFTA further grants Mexico the ability to grant import and export licenses, and to reserve foreign trade in specified products to PEMEX, this was specifically created in deference to PEMEX’s monopoly status. The reserved enumerated goods include virtually all refined petroleum products, plus bitumen, oil shale and tar sands, and LPG. (Annex 603.6)
NAFTA sets out a legal zone of exclusion in Annex 603.3, which specifies which energy materials and activities the Agreement governs. On its face, this highly unusual clause runs counter to most free-trade precepts, as it allows Mexico total state control over the exploration, exploitation, and refinement of hydrocarbons. Further, it reserves processing, and pipelining of crude oil, natural gas and basic petrochemicals to be administered by PEMEX. NAFTA leaves five basic Petrochemicals such as butane, ethane, heptane, hexane, and pentanes to be exclusively controlled by PEMEX; but leaves fifteen petrochemicals open for Foreign Direct Investment (FDI).
When end users and suppliers find cross border trade beneficial, the Agreement allows them to negotiate supply contracts amongst themselves. It also widens the population of those who may invest in electricity generation. Annex 602.3 1(c) vests the State with the exclusive right to engage in generation, transmission, distribution, and sale of electricity Even then, other parts of NAFTA permit FDI for production in personal use (self generation), co-generation, and independent power production, on the condition that excess energy be sold back to the CFE (Mexico’s state-owned electricity firm). In an important concession, NAFTA allows Mexico's state-owned monopoly [the CFE), and electricity producers in Canada and the U.S., to negotiate their own electricity purchases, and to draft their own purchase agreements and sale contracts.
In almost a post-Imperium sense, NAFTA's rules and regulations craft a road map to a continental energy polyglot, with the potential to increase energy security on the demand and supply sides for member states. If the NAEA reaches fruition, it can precipitate a much needed technology transfer to the Mexican Energy sector, and finance PEMEX's efforts to exploit technology intensive off-shore exploration. Respect for Mexican constitutional law is essential, but needed FDI can be incorporated in sectors such as service contracts, and the fifteen permissible petrochemicals open for FDI. NAEA will provide a foundation for continental cohesion; it may well be the legal Rosetta stone for North American interdependence decades into the future.


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