During ratification proceedings for the North American Free Trade Agreement (Nafta) in the U.S., Mexico, and Canada, environmental protection will be a major issue. This represents a triumph of environmentalism-one that the oil and gas industry has reason to welcome. But industry must ensure that all environmental issues raised by the treaty receive proper attention.
Nafta breaks new ground by making environmental protection part of an economic treaty. It allows signatories to apply strict environmental requirements on investments as long as they treat all investors alike. This is reasonable. Uneven rules distort capital flows, and unevenly applied rules can function as backhanded protectionism.
A WATERSHED AGREEMENT
William Reilly, administrator of the U.S. Environmental Protection Agency, calls Nafta a "watershed" because of this integration of international economic and environmental policy. His assessment is sound, the achievement worthy of applause. Nafta sets a healthy pattern for handling environmental issues in concert rather than conflict with economic concerns. It's the only pattern consistent with future human progress. Whether it can survive the ratification process remains to be seen.
Environmental objections to Nafta are inevitable. The industry, without threatening ratification, should raise one such concern not likely to emerge from elsewhere: the potential waste of natural resources.
Nafta does not change Mexico's constitutional prohibition against oil and gas development by anyone other than the state. A Mexican investor thus can explore and produce in Texas or Alberta, but investors from the U.S. and Canada cannot do the same in Chiapas. To their credit, U.S. and Canadian representatives didn't ignore this question of basic fairness during negotiations. Mexican national pride nevertheless prevailed.
But the question has an environmental dimension. To the extent a state monopoly fails to find and produce Mexican oil and gas as efficiently as a private company might, it wastes a natural resource by leaving part of it in the ground.
Petroleos Mexicanos is no exception to the rule, rapidly gaining credence throughout the world, that state monopolies don't work as efficiently as their private counterparts. The pace of Mexican oil and gas development is a function of state budgets; in the past decade, a period of fiscal torpor, the effort all but stalled. That's not the efficient way to manage an economically crucial natural resource. And efficiency gains nothing from the world scale Pemex bureaucracy, which the government itself wants to streamline.
To some degree, therefore, inefficiencies characteristic of state monopolies keep the Mexican resource from yielding as much oil and gas as it otherwise could. Economically recoverable oil and gas remain in the ground, contributing nothing to national wealth-wasted, in other words.
UNORTHODOX VIEW
This view-that oil and gas left in the ground are wasted-is not part of environmentalist orthodoxy. But it should be for the same reasons that Reilly was correct to cheer Nafta's integration of economic and environmental priorities. If the U.S. took this view of waste, it would not so readily foreclose leasing of its exploratory frontiers and face such rapid growth in reliance upon oil brought to market in tankers.
For lowering trade barriers, Nafta deserves the oil and gas industry's support. But the treaty preserves officially cavalier approaches toward resource development in Mexico and the U.S. That's an environmental problem doomed to oblivion unless the industry presses the case against waste.
Copyright 1992 Oil & Gas Journal. All Rights Reserved.
