Energy companies in the U.S. will benefit-but not as much as they had hoped-from the recently drafted North American Free Trade Agreement (Nafta) among the U.S., Mexico, and Canada.
Nafta would remove most of the trade barriers between Mexico and the other two countries and supplement the U.S.-Canada Free Trade Agreement to create an open market in North America totaling $6 trillion/year in products and serving more than 360 million persons.
Nafta was negotiated under a law that allows Congress to consider the pact for only 90 days, then vote on it without amendments. Final language in the draft treaty won't be complete until September. Congress plans to adjourn in October, so legislators aren't expected to vote on the treaty until next year.
The pact marks the first time the U.S. has covered environmental concerns in a trade treaty, mainly pollution along the U.S.-Mexico border. The pact also is consistent with the international General Agreement on Tariffs and Trade (GATT).
WHAT'S PLANNED
Under Nafta, 65% of U.S. industrial and agricultural exports to Mexico will be duty free immediately or within 5 years. Mexico's tariff s currently average 10%, about 2 1/2 times greater than the average U.S. tariff.
Tariffs on most petroleum equipment going to Mexico are expected to decline from the current 20% to 16% in the first year of the agreement. In the third year they would begin phasing down during 5-10 years.
Specific schedules aren't yet available. Carla Hills, U.S. trade representative, said negotiators are working on detailed tariff sheets covering 9,000 products.
Also, under Nafta, Petroleos Mexicanos will open half of its procurement to foreign companies in the first year of the agreement, increasing to 100% by the end of 10 years.
Separately, U.S. and Mexican officials last week approved a treaty to avoid double taxation of income on companies doing business in both nations. It was the first U.S.-Mexico income tax treaty and complements Nafta.
ENERGY PROVISIONS
Nafta recognizes with "full respect" the Mexican constitution, which prohibits foreign companies from owning Mexican oil reserves.
However, a description of Nafta says, "Each country will also allow its state enterprises to negotiate performance clauses in their service contracts." That would apply to Pemex's dealings with American and Canadian oil companies and drilling contractors.
The description notes, "The energy provisions incorporate and build on GATT disciplines regarding quantitative restrictions on imports and exports as they apply to energy and basic petrochemical trade.
"Nafta provides that under these disciplines a country may not impose minimum or maximum import or export price requirements, subject to the same exceptions that apply to quantitative restrictions.
"Nafta also makes clear that each country may administer export and import licensing systems, provided they are operated in a manner consistent with the provisions of the agreement.
"In addition, no country may impose a tax, duty, or charge on the export of energy or basic petrochemical goods unless the same tax, duty, or charge is applied to such goods when consumed domestically."
The description also said, "Nafta confirms that energy regulatory measures are subject to the agreement's general rules regarding national treatment, import and export restrictions, and export taxes.
"The three countries also agree that the implementation of regulatory measures should be undertaken in a manner that recognizes the importance of a stable regulatory environment."
Mexico did not accept a provision, similar to one in the U.S.-Canada pact, that would have required it to share crude or petrochemicals in times of shortage.
Also citing national security, Mexico reserved to itself activities and investment in its oil, gas, refining, basic petrochemicals, nuclear, and electrical power sectors. Mexico was expected to define basic chemicals as ethane, propane, butane, pentane, hexane, heptane, carbon black feedstocks, and light and heavy naphtha.
OTHER SECTIONS
The summary also said, "The Nafta energy provisions recognize new private investment opportunities in Mexico in nonbasic petrochemical goods and in electricity generating facilities for 'own use,' cogeneration, and independent power production by allowing Nafta investors to acquire, establish, and operate facilities in these activities.
"Investment in nonbasic Petrochemical goods is governed by the general provisions of the agreement.
"To promote cross-border trade in natural gas and basic petrochemicals, Nafta provides that state enterprises, end users, and suppliers have the right to negotiate supply contracts.
"In addition, independent power producers, Mexico's state owned electrical power firm CFE, and electric utilities in other Nafta countries also have the right to negotiate power purchase and sale contracts."
Regarding Mexico's government energy firms, "when buying or selling a monopoly good or service, the monopoly must follow commercial considerations, consistent with the terms of its government mandate, and must not discriminate against goods or businesses of the other Nafta countries.
"Nafta provides that each country must ensure that such monopolies do not use their monopoly positions to engage in anticompetitive practices in nonmonopoly markets in that country's territory."
The pact provides for nondiscrimination against U.S. companies operating businesses in Mexico, allows them to repatriate capital, drops requirements for government approval of new investments, protects against expropriations, and provides a dispute settlement mechanism.
REACTIONS
John Easton, a deputy secretary in the U.S. Department of Energy, said the energy chapter will reduce the risk of future government intervention in the energy marketplace and lock in gains in access to Mexico's energy sector.
He said because of Mexico's constitution, U.S. firms will not be able to obtain concessions to explore and develop reserves in Mexico.
"However, we made significant gains in some other areas," he said.
Easton added, "We believe further liberalization may be possible" regarding oil and natural gas exploration in Mexico. Easton noted Nafta will allow U.S. companies to produce more petrochemicals in Mexico and sell gas there without going through government monopolies.
He said reductions in tariffs should help increase exports of oil field equipment and supplies to Mexico. He noted Pemex is buying about $5 billion/year in goods and services.
The American Petroleum Institute said, "We support the objectives of free trade. The recently completed agreement will produce economic benefits for the citizens of Mexico, Canada, and the U.S.
"We are, of course, disappointed that the energy sector was not more fully included. The agreement should have permitted the citizens of Mexico, Canada, and the U.S. equal opportunity to invest reciprocally."
President Bush said, "The principal challenge now facing the U.S. is to compete in a rapidly changing and expanding global marketplace. This agreement will level the North American playing field, allowing American companies to increase sales from Alaska to Yucatan.
"More than 600,000 Americans are now employed making products and selling them to Mexico, our fastest growing major export market.
"We sold more than $33 billion worth of goods to Mexico last year, and are projected to sell $44 billion this year.
"In the past 5 years, as President Carlos Salinas de Gortari has dismantled many long standing Mexican trade and investment restrictions, our exports to Mexico have nearly tripled. This agreement helps us lock in these gains and build on them."
William Reilly, Environmental Protection Agency Administrator, called Nafta "a watershed in the history of environmental protection because it integrates economic and environmental concerns to an unprecedented degree."
He noted it permits the three countries to impose stringent environmental requirements on investors, as long as they are applied equally to domestic as well as foreign investors.
"It discourages parties from backing away from environmental laws and practices to attract investors."
Copyright 1992 Oil & Gas Journal. All Rights Reserved.
